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Portugal 2021 OECD Economic Survey Overview
Portugal 2021 OECD Economic Survey Overview
Portugal 2021 OECD Economic Survey Overview
Portugal
OVERVIEW
http://www.oecd.org/economy/portugal-economic-snapshot/
This Overview is extracted from the 2021 Economic Survey of Portugal. The Survey is published on the
responsibility of the Economic and Development Review Committee of the OECD, which is charged with the
examination of the economic situation of member countries.
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3
Table of contents
Executive Summary 8
1 Key policy insights - Portugal 13
The COVID-19 crisis is threatening social and economic progress 14
Mitigating the social and economic impact of the pandemic 17
The COVID-19 outbreak has triggered a major health crisis 17
The economic recovery is fraught with risks 20
Policy support should continue, but adapt to the evolution of the pandemic 26
Strengthening macroeconomic fundamentals for a sustainable recovery 36
Improving the sustainability and the quality of public finances 36
Further enhancing the stability of the financial system 40
Policy reforms for more inclusive and greener growth 44
Tackling in-work poverty 44
Strengthening social assistance 46
Improving housing affordability 47
Adapting long-term care to fast population ageing 48
Moving towards a green and sustainable economy 50
Ramping up efforts to fight corruption and money laundering 53
References 59
Tables
Table 1. The recovery is robust 9
Table 1.1. Macroeconomic indicators and projections 25
Table 1.2. Low-probability events that could lead to major changes in the outlook 26
Table 1.3. Estimated impact of selected policy recommendations on GDP per capita 27
Table 1.4. Illustrative direct fiscal impact of selected policy recommendations 27
Table 1.5. Past OECD recommendations on improving judicial efficiency and insolvency regime 33
Table 1.6. Past OECD recommendations to address fiscal and financial risks 44
Table 1.7. Past OECD recommendations on environmental policies 53
Table 1.8. Past OECD recommendations on anti-corruption policies 56
Table 1.9. Recommendations on macroeconomic and structural policies from the Key Policy Insight chapter 57
Figures
Figure 1. The pandemic severely hit the economy 9
Figure 2. Job losses were concentrated on young and temporary workers 10
Figure 3. Adult digital skills are below average 11
Figure 1.1. The pandemic severely hit the economy 14
Boxes
Box 1.1. Main policy responses to the COVID-19 crisis 15
Box 1.2. Illustrative impact of structural reforms 27
Box 1.3. Portugal’s Recovery and Resilience Plan 31
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* Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data
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Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International
Labour Organisation, International Monetary Fund, United Nations, World Bank, Eurostat, Statistics Portugal.
Executive Summary
conditions in Portugal’s Recovery and Resilience Increases in credit defaults can weigh on banks’
Plan is thus welcome. profitability and curtail credit supply needed to
finance investment. The regulator and the
Figure 2. Job losses were concentrated on
supervisor have strengthened incentives for banks
young and temporary workers to limit the accumulation of non-performing loans in
Index, 2019Q4 = 100 their balance sheets. Measures supporting the
120
development of secondary markets for non-
110 performing loans would also help with the disposal
100 of impaired assets. Policy options include
establishing a national asset management
90
company.
80 Total employment
Employment under temporary contract Once the recovery is well established, Portugal
70
Employment of workers under 25 needs to announce a credible and transparent
60 medium-term fiscal consolidation strategy.
18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3
Public debt exceeds 130% of GDP and is one of the
Source: Statistics Portugal. highest in the OECD. Fast population ageing
StatLink 2 https://stat.link/gb71qs weighs on public finance and risks to sustainability
The pandemic has exposed important have accentuated with the rise of contingent
vulnerabilities in the healthcare sector. During liabilities. The pension system needs to adapt to
the third wave of the outbreak around the end of contain future increases in age-related costs.
2020, public hospitals almost reached full capacity, The modernisation of the budget framework,
delaying access to healthcare. Staff shortages of including the implementation of performance
nurses and long-term care workers are large and budgeting, is crucial to ensure an efficient use of
workload on healthcare professionals has public funds, including those provided by the EU.
increased substantially. The pandemic has Enforcement of the 2015 Budget Framework Law,
accentuated mental health problems, calling for a one of the objectives of the Recovery and
rapid strengthening of policies in this area. Resilience Plan, needs to accelerate and the
A sustainable recovery requires capacity to monitor and evaluate policies needs to
improve to shift spending to productive uses.
addressing macroeconomic
vulnerabilities. The Next Generation EU is a unique opportunity
to put growth on an environmentally
Policy action needs to tackle new financial and sustainable path. Reducing water abstraction
fiscal risks. Efforts to establish the foundations remains a key priority, calling for further
for a greener economy should be strengthened. investments in upgrading existing water
Insolvencies risk surging after the phase out of infrastructure. Reaching the ambitious target of
public support. A large share of Portuguese firms becoming a carbon neutral economy by 2050
are small, undercapitalised, and vulnerable to requires, as envisaged in the National Energy and
economic shocks. The moratorium on credit Climate Plan 2030, a significant acceleration in
repayments covered around a third of bank loans to emission abatement, including by further increasing
non-financial corporations before being phased out electricity supply from renewables and greening the
in September 2021. Quasi-equity instruments or transport sector. Policy action must combine
provision of non-refundable grants can reduce the incentives to reduce environmental damages,
risk of a surge in defaults and debt overhang. Past investment support in less polluting activities and
reform of the insolvency regime improved its compensation measures for low-income
effectiveness and should facilitate firms’ households affected by the measures.
restructuring. The use of out-of-court procedures Intensifying the fight against corruption can
has remained limited though, and a large backlog foster inclusive growth. Preventing economic
of cases poses the risk of court congestion in the crimes has been high in the government agenda
future. and the on-going implementation of the new
national anti-corruption strategy is welcome. Reform of the education and training systems
Strengthening the prosecution mechanisms and needs to accelerate. A large share of schools and
raising the accountability and integrity of senior teachers are not well equipped to use and teach
public officials are priority. ICT. Inequality issues in education have
accentuated with the pandemic. Efforts to develop
Unleashing the digital potential can lift teachers’ training and equip schools should
productivity growth. continue. Despite ambitious measures to develop
A higher uptake of digital technologies – adult education, participation has remained
through better infrastructure and skills relatively low, suggesting the need for increased
development – can boost potential growth. EU incentives to uptake training, especially for workers
support could help speed up this change. in jobs more affected by the digital transformation.
Policy avenues to promote adult education include
Digital technologies can contribute to speeding providing personal training accounts with more
up the recovery, by boosting productivity and generous vouchers for low-skilled workers, together
offering innovative solutions to adapt to behavioural with expanding the training offer by developing
changes triggered by the pandemic. Portugal has online courses and flexible pathways between
achieved impressive progress in the digital qualification programmes further.
transition, but disparities in ICT adoption across
firms and people remain large. The 2020 Digital Figure 3. Adult digital skills are below average
Transition Action Plan that aims at tackling the Share of individuals with above-basic overall digital
digital divide is welcome as delays in technology skills, 2019
%
diffusion, especially in small firms, hurt productivity 70
growth and inclusiveness. 60
50
Communication infrastructure is of good
40
quality but fibre deployment and coverage in 30
rural areas should be improved. While fast- 20
broadband subscriptions are among the highest in 10
the OECD, there is room to expand the use of 0
ITA PRT ESP OECD ISL
mobile broadband. Broadband prices are high by
international standards, including for basic Source: Eurostat.
services, reflecting low competition pressures StatLink 2 https://stat.link/wy7tpr
among service providers. Reducing barriers to
consumer mobility between suppliers can improve There is large room to increase investment in
market contestability. digital technologies and in complementary
intangible assets in small firms. A range of
Equipping the population with digital and measures is in place to foster the adoption of ICTs
foundational skills is crucial to embrace the and to promote partnerships between firms and
digital transformation. A relatively large share of research institutes to stimulate innovation. Their
the population has low education levels and only scope should expand with the implementation of the
one third of Portuguese have above basic digital Recovery and Resilience Plan. The multiplication of
skills (Figure 3). The lack of digital skills is initiatives poses some risk of dispersion and
particularly pronounced among older workers and efficiency losses, calling for a thorough evaluation.
low-educated people. Despite some progress in the
past, more women could graduate in ICT fields. The
scope of the comprehensive and ambitious initiative
to develop digital competences “Incode2030” will
expand with the implementation of the 2020 Digital
Transition Action Plan.
The COVID-19 pandemic has raised multiple challenges for Portugal and exacerbated existing
weaknesses. It triggered a major health crisis, reversed the strong recovery from the last downturn and
caused the deepest post-war recession (Figure 1.1). The economy recovered fast, supported by the policy
response notably the provision of income support, measures facilitating credit expansion and supporting
job retention (Box 1.1). In addition, Portugal has managed to have one of the highest vaccination rates
worldwide, notably for older persons, who are almost fully vaccinated. However, virus mutations might
complicate the containment of the virus and the authorities should keep encouraging its population to take
vaccination boosters. Supportive economic policies must be maintained to prevent this crisis from leaving
profound scars on the economy and the society.
Figure 1.1. The pandemic severely hit the economy
Gross Domestic Product, Index 2015Q1 = 100
115 115
110 110
105 105
100 100
95 95
90 90
Portugal Peers OECD
85 85
80 80
2015 2016 2017 2018 2019 2020 2021
Note: Peers refer to the weighted average of Greece, Italy and Spain.
Source: OECD Economic Outlook: Statistics and Projections (database) and updates.
StatLink 2 https://stat.link/cy9gjz
The pandemic has significantly affected living standards. The disproportionate impact of the crisis on
sectors with abundant seasonal, temporary and low-paid jobs, such as hospitality and tourism, and on
people with pre-existing financial difficulties may reverse the progress made in reducing poverty and
inequality levels in recent years (Figure 1.2). By the end of 2020, the number of people receiving income
support in the form of unemployment benefits and the number of registered unemployed increased by
around 40% and 30% respectively compared to 2019. Women, youth, and low-skilled workers were
overrepresented among the newly registered unemployed (IEFP, 2020). The crisis also risks aggravating
low self-perception of well-being (OECD, 2019a).
NLD
FRA
JPN
TUR
CHL
BEL
DEU
CAN
GRC
PRT
SWE
POL
AUS
ESP
KOR
GBR
USA
MEX
OECD
Note: 1. Gini coefficient measured after taxes and transfers. 2. Poverty rate after taxes and transfers; poverty line taken as half the median
household income of the total population.
Source: OECD (2020), OECD Income Distribution Database.
StatLink 2 https://stat.link/iqk91l
Portugal needs a strong policy response to avoid a deterioration in living standards and put growth on a
sustainable and resilient path. With an ageing and fast-shrinking working age population (Figure 1.3),
future growth will hinge on productivity gains. At the same time, like in most OECD countries, productivity
growth has been low (Figure 1.4), and the COVID-19 crisis has already put a drag on productivity drivers,
including business dynamism and investment. A package of reforms can bring substantial support to the
recovery and long-term growth without derailing public finances. Portugal should seize the opportunity
provided by the massive financial support from the EU to initiate positive socio-economic changes and
address long-term challenges, including climate change and the digital revolution.
Figure 1.3. The population is declining and ageing faster than in most OECD countries
A. Elderly population B. Working age population
65+ year-olds, share of population 15-64 year-olds, share of population
% %
45 75
2019 2060 Portugal OECD
40
35 70
30
65
25
20
60
15
10 55
5
0 50
2000 2010 2020 2030 2040 2050 2060
ITA
MEX
TUR
KOR
COL
CHL
AUS
USA
CAN
GBR
BEL
NLD
POL
ESP
CZE
FRA
DEU
GRC
SWE
PRT
OECD
ITA
DEU
TUR
FRA
CHL
CZE
JPN
ESP
AUS
NLD
USA
MEX
GRC
PRT
KOR
GBR
BEL
POL
SWE
OECD
Against this background, the main messages of the Survey are the following:
Policy needs to remain supportive until the recovery from the pandemic is well underway. In
parallel, the government should design a prudent fiscal consolidation trajectory and implement it
once the recovery is firmly established.
A resilient, sustainable, and inclusive recovery hinges on the capacity to improve access to
healthcare, support viable firms and jobs, transition to greener technologies, prevent a rise in
poverty and social exclusion, and cope with an ageing population.
Accelerating the digital transition is central to facilitate the changes of the economy to a post-
pandemic world, while boosting productivity growth. This notably requires equipping the population
with adequate skills, expanding communication infrastructure and supporting technology adoption
by small firms.
While Portugal has been less affected by the COVID-19 pandemic than many other European countries
during the first wave of the virus, subsequent waves hit the country hard (Figure 1.5, Panel A and B). In
January 2021, Portugal had the highest rates of new infections and deaths worldwide. Some relaxation
during the Christmas’ period in 2020 combined with the emergence of a more contagious virus variant led
to a fast rise in infections. The partial lockdown and geographically targeted containment measures
introduced in response up to mid-January 2021 were insufficient to slow the spread of the virus. The
number of infections declined with the introduction of a second lockdown on 15 January. As Portugal has
low hospital and intensive care units (ICU) capacities (Figure 1.5, Panel D), the virus surge put strong
pressure on the healthcare system, with hospitals reaching full occupancy rates in early 2021 (Reuters,
2021). With the emergence of new variants of the virus, accelerating planned increases in hospital
capacity, including ICU beds, remains crucial. The number of ICU beds increased significantly in 2020
(Figure 1.5) and is planned to reach the OECD average in 2021.
20 0.5
0 0.0
Mar.20 Jun.20 Sep.20 Dec.20 Mar.21 Jun.21 Sep.21 Mar.20 Jun.20 Sep.20 Dec.20 Mar.21 Jun.21 Sep.21
ITA
JPN
MEX
MLD
NZL
DNK
NOR
CHE
CHL
PRT
AUS
ESP
KOR
HUN
CAN
FRA
POL
USA
DEU
BEL
AUT
GBR³
OECD
Note: 1. 7-day moving average. Peer refers to the weighted average of Greece, Italy and Spain. 2. 7-day moving average. The stringency index
score is an index averaged across eight closure and containment policy components. 3. There may be differences in the notion of intensive care
affecting the comparability of the data. 4. Estimated. Portugal plans to have 931 ICU beds for the end of 2021 (9.1 ICU beds/100.000 inhabitants).
5. 7-day moving average. Peers refer to the simple average of Greece, Italy and Spain.
Source: European Centre for Disease Prevention and Control (ECDC) though Our World in Data; OECD calculations based on the Oxford
COVID-19 Government Response Tracker https://covidtracker.bsg.ox.ac.uk/; OECD (2020), "Beyond containment: Health systems responses
to COVID-19 in the OECD", OECD Policy Responses to Coronavirus (COVID-19), https://doi.org/10.1787/6ab740c0-en.
StatLink 2 https://stat.link/jsv2da
The high vaccination rate of the population, which is a major achievement of Portugal, likely played a
crucial role in moderating the fourth wave of the pandemic. Like most European countries, Portugal started
its vaccination campaign at the end of December 2020. Despite the rollout of vaccination being initially
relatively slow, like in most European countries, Portugal has managed to reach the highest vaccination
rate in the OECD, with more than 85% of the population fully vaccinated. However, due to high uncertainty
regarding virus mutations, physical distancing measures, testing, tracing and isolating measures will
remain key to control the fifth wave of the virus and other future surges in infections though.
The COVID-19 pandemic has accentuated critical gaps and deficiencies in the healthcare system,
especially long waiting times for specialised care. In 2020, hospital emergency attendance has declined
by almost 30% and more than one-third of the population reported having forgone a needed medical
examination or treatment during the first wave of the pandemic (OECD, 2021a). People with chronic health
conditions have faced major disruptions to routine care. Hospital waiting times for surgery and outpatient
appointments increased and non-essential operations were delayed. This will result in a significant backlog
of surgeries that will likely take some time to be resolved after the crisis.
Proper access to medical care requires a sufficient number of doctors, with an adequate mix of generalists
and specialists and a balanced geographic distribution to serve the population across the whole country.
The COVID‑19 pandemic substantially increased the workload of most health workers, accentuating
shortages in the health workforce. The number of practising doctors is estimated to be slightly below the
EU average (OECD, 2020a). Shortages are particularly critical for nurses (Figure 1.6), as they tend to
emigrate due to large differences in remuneration level and career opportunities abroad (Simões et al.,
2017). Current plans to improve working conditions of health professionals are thus a welcome step
forward. A number of OECD countries have taken actions to improve service availability either by targeting
medical students early in their training or by providing financial incentives to practice in underserved areas.
A more widespread use of telemedicine could also help to improve access to healthcare (see Chapter 2).
Figure 1.6. The shortage of health professionals is significant
Share of practicing nurses per 1000 population, 2018 or latest year available
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
ITA
ISR
JPN
FIN
IRL
ISL
LTU
TUR
MEX
GRC
LVA
COL
CHL
POL
SVK
ESP
HUN
KOR
GBR
SVN
NZL
FRA
NLD
DEU
CHE
NOR
EST
AUT
PRT
CZE
CAN
DNK
SWE
AUS
LUX
USA
BEL
OECD
Note: Data in France, Portugal and Turkey include not only nurses providing direct care to patients, but also those working in the health sector
as managers, educators, researchers, etc. Greece report only nurses employed in hospital. Data in Chile refer to all nurses who are licensed to
practice.
Source: OECD Health Statistics 2019/2020; Eurostat Database.
StatLink 2 https://stat.link/ev0r4i
The COVID-19 pandemic has accentuated mental health problems particularly for people with pre-existing
mental health disorders. In Portugal, over 20% of adults reported symptoms of psychological distress
before the crisis, one of the highest rates across Europe (Figure 1.7). Empirical evidence shows that
community mental health services are much more effective to address mental distress, and are preferred
by patients and their families, but the provision of such services is limited in Portugal, especially in rural
areas (Perelman et al., 2018). The Portuguese mental health system is centred on hospitalisation
treatment and emergency consultations, unevenly distributed in the country (WHO, 2018; Perelman et al.,
2018). The government plans to phase out user charges for psychiatrists in hospitals, but this will not be
sufficient to improve accessibility. Portugal needs to implement a comprehensive mental health strategy
that includes prevention and promotion. It is thus welcome that the Recovery and Resilience Plan includes
measures to enforce the National Mental Health Plan adopted in 2008.
Figure 1.7. Prevalence of psychological distress is high
Per cent among population aged 16 and over, 2018
% %
25 25
20 20
15 15
10 10
5 5
0 0
FIN
IRL
ITA
NLD
LUX
AUT
SWE
CZE
LTU
FRA
CHE
NOR
HUN
ROU
GBR
DNK
POL
SVN
DEU
EST
SVK
ESP
LVA
GRC
PRT
BEL
OECD
Source: OECD (2020) calculations based on EU survey on Statistics on Income and Living Conditions (EU-SILC).
StatLink 2 https://stat.link/m6uq7x
Portugal was among the OECD economies most strongly hit by the pandemic, but has been recovering
fast since mid-2021 (Figure 1.8). A deep decline in GDP followed lockdown measures imposed to slow the
spread of the virus in March 2020, which were lifted in mid-2020, and successive containment measures,
which were introduced subsequently due to the health situation. Private consumption plunged due to high
uncertainty, fear of contagion, and mobility restrictions (Figure 1.8, Panel B). Activity has been constantly
supported by policy measures and rebounded markedly each time when diverse restrictive measures were
lifted. Nonetheless, the recovery has been uneven, as the hit was particularly strong in the tourism,
hospitality and transport sectors that have a relatively large weight in the economy. By contrast, activity in
construction and manufacturing remained strong in 2020. As the health situation improved and most of the
restrictions were removed, activity in the services sector has gained momentum, associated with strong
household consumption since the second quarter of 2021.
Figure 1.8. The shock to GDP was among the largest in the OECD, but the economy is recovering
A. Change in GDP B. Contributions to GDP growth¹
Between 2019Q4 and 2020Q4
% %
2 20
16
0 12
8
-2
4
-4 0
-4 Net exports
-6 Stockbuilding
-8
Investment
-8 -12 Government consumption
-16 Private consumption
-10 Real GDP growth
-20
ITA
ESP
BEL
FRA
COL
NLD
POL
CAN
DEU
USA
AUS
JPN
GRC
PRT
CZE
CHL
GBR
MEX
KOR
SWE
OECD
Note: 1. Contribution to GDP growth relative to the same quarter of the previous year.
Source: OECD (2021), Economic Outlook database.
StatLink 2 https://stat.link/cqdnli
Portugal’s economy has been particularly vulnerable to the pandemic due to its high reliance on
international tourism (Figure 1.9). Tourism has been one of the most severely hit sectors, with a 58%
decline in travel and tourism exports in 2020. The share of tourism in total export declined from 19.5% in
2019 to 10.4% in 2020. Since March 2020, hotels, restaurants and touristic attractions have operated with
restricted capacity due to health protocols and international aviation restrictions. While most of mobility
restrictions have been removed, the tourism sector has recovered strongly over the past months
(Figure 1.9). The total revenue in the sector in the first nine months of 2021 has already exceeded that for
the whole year of 2020. Despite this strong recovery, activity in the tourism sector still remains well below
pre-crisis levels.
Public support weathered the impact of the crisis on the labour market. In 2020, unemployment rose
moderately compared with the decline in economic activity as nearly 15% of the labour force benefited
from various temporary forms of state support at the height of the crisis (Bank of Portugal, 2020a), including
notably the job retention schemes (Box 1.1). Both employment and, to a lesser degree, labour force
participation have risen along with the economic recovery (Figure 1.10). The unemployment rate has
declined to 6.3% (those aged 15-74) as of the third quarter of 2021, from 8.2% at its peak in 2020.
Nonetheless, the recovery in employment has been uneven across workers, as employment among
previously temporary or part-time workers and those with lower educational attainment remains well below
pre-crisis levels.
12 70
60
10
50
8
40
6
30
4
20
2 10
0 0
ITA
ITA
JPN
JPN
FRA
FRA
BEL
AUS
CHL
GBR
NLD
KOR
GRC
PRT
MEX
PRT
POL
CAN
USA
CZE
SWE
DEU
ESP
DEU
USA
MEX
GBR
CAN
AUS
BEL
CHL
NLD
SWE
ESP
CZE
POL
OECD
OECD
C. Nights spent at tourist accommodation establishments
100 100
80 80
60 60
40 40
EU27 Peers Portugal
20 20
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: Peer countries refer to Greece, Italy and Spain. 1. GDP data for France refer to internal tourism consumption. GDP refers to GVA for
Canada, Chile, Denmark, Finland, Germany, Greece, Italy, Mexico, New Zealand, Portugal, Sweden, United Kingdom and the United States.
GDP data for Korea and Spain includes indirect effects.
Source: OECD Tourism Statistics; Eurostat.
StatLink 2 https://stat.link/3ealur
IRL
ITA
USA
LVA
NOR
DNK
CAN
ESP
CZE
AUS
NLD
LUX
DEU
GBR
CHE
FRA
BEL
PRT
AUT
NZL
SWE
Note: 1. Take-up rates are calculated as a percentage of dependent employees in 2019 Q4. Data refer to end May except for Luxembourg and
Switzerland (end April). Australia, Canada, Ireland, the Netherlands and New Zealand operate wage subsidy schemes, which are not conditional
on the reduction in working hours. United States: data refer to participation in short-time compensation schemes.
Source: Eurostat (2021) Labour Force Survey; OECD (2021), Short-Term Labour Situation database; OECD (2020), "Job retention schemes
during the COVID-19 lockdown and beyond", OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris,
https://doi.org/10.1787/0853ba1d-en; Ministry of Labour.
StatLink 2 https://stat.link/1vz3wa
A large number of firms have faced financial stress, which has been mitigated by policy measures. Survey
data suggest that half of the firms were benefiting from some public support at the end of 2020 (Bank of
Portugal/INE, 2020, Bank of Portugal, 2020c). Government liquidity measures, including a moratorium on
credit instalment payments and credit lines with public guarantees, and the European Central Bank’s
accommodative monetary policy have contributed to maintaining credit, preventing a surge in insolvencies
and credit defaults. Business investment dropped during the first lockdown and has been weighed down
by supply constraints as well as liquidity and solvency concerns in some firms (Bank of Portugal, 2021c).
Nonetheless, public and residential investment have remained strong, supported by EU funds, and overall
gross fixed capital formation has already surpassed pre-crisis levels.
Both exports and imports declined strongly in 2020 due to the crisis and have recovered unevenly
(Figure 1.11). Imports have rebounded fast over the past quarters as domestic demand has gained
momentum, while the recovery of exports has been comparatively limited, leading to a deterioration of the
current account balance. In 2020, exports of goods and services contracted sharply (-20.5% in nominal
terms), which was even more pronounced for tourism (-57.8%). Brexit also weighs on exports and
investment, as the UK was the destination of around 10% of exports, the largest market for travel exports
(around 18% of total), and the fifth largest source of foreign direct investment before the pandemic. In fact,
the contraction of exports to the UK was stronger than that of overall exports in 2020 (total goods and
services declined by 34.4% and tourism by 63.4%).
Figure 1.11. Activity and confidence have recovered, but remained below pre-crisis levels
A. Production and consumption B. Exports and imports of goods and services
Y-o-y, % change, 3-month moving average Y-o-y, % change
% %
30 100
80
20
60
10 40
20
0
0
-10 -20
Exports (volume)
Industrial Production (volume) -40
-20 Imports (volume)
Retail sales (volume) -60
-30 -80
2009 2011 2013 2015 2017 2019 2021 18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1
Source: OECD Monthly Economic Indicators; Refinitiv; Eurostat, Economic Sentiment Database.
StatLink 2 https://stat.link/drujnb
After a steep decline of 8.4% in 2020, GDP is projected to strongly rebound in 2021 and 2022 following
the lift of restriction measures and the rollout of vaccination as well as the absorption of EU funds
(Table 1.1). Despite still high uncertainty and corporate debt, investment will be solid, supported by the
Next Generation EU programme. Consumers spending, which rebounded recently following the removal
of mobility restrictions, will remain robust. Exports, still subdued, will be slow to recover fully, reaching the
pre-crisis level only at the beginning of 2023, as tourism is expected to continue to be affected by mobility
restrictions across borders. As job support measures will have been phased out, unemployment can
increase in particular among workers with precarious jobs and low wage levels who have higher propensity
to consume. In the absence of additional policy measures, the end of moratoria in debt repayments will
likely trigger an increase in credit defaults and liquidations.
Inflation turned negative in 2020, but has been rising relatively strongly over the past months, standing at
1.8% in October 2021, essentially driven by high energy prices. Production costs have risen strongly largely
due to energy prices and supply constraints as the industrial production prices index rose 13.3% year-on-
year in September 2021. However, the current rise in production costs is not expected to fuel underlying
price pressures so far, given still sizeable slack in the economy (Table 1.1). Since October 2021, the
government has introduced a number of measures to cushion the negative effects from rising energy
prices, such as fuel subsidies for households and for public transport operators as well as a control of fuel
marketing margins.
Risks to the outlook are significant. Like in all other OECD countries, the evolution of the pandemic remains
the major factor that will determine future economic performance and is difficult to predict. Downside risks
include the spread of new variants of the virus and low effectiveness of vaccines that could lead to new
containment measures and low confidence. The current rise in energy prices can be more protracted than
expected, which would weigh on production and consumption in spite of the relief measures introduced
recently by the government. A rapid implementation of the Recovery and Resilience Plan will be key to
sustain a fast recovery. A stronger rebound in tourism could accelerate GDP growth, notably by improving
employment prospects for vulnerable workers affected by the crisis. In contrast, the recovery of tourism
can be even slower than expected, if the pandemic affects tourists’ preferences and confidence
permanently.
Maintaining Portugal’s comparative advantage in tourism is crucial to sustain the recovery in the medium
run. A set of targeted measures (i.e. earmarked credit lines, VAT vouchers, creation of a “Clean and Safe”
label among other measures to ensure tourists’ safety) rightly aimed at protecting companies and jobs in
the sector so they can operate after the lifting of containment measures. So far, the crisis did not seem to
have affected Portugal's productive capacity as a tourist destination. The number of jobs in hospitality and
restaurants in 2020 declined by 8.9%, which only moderately recovered in 2021, but the number of touristic
accommodation establishments, travel agencies and touristic animation enterprises registered in the
national tourism registration system has increased compared with 2019. In the longer run, fully reaping the
benefits of the recovery of tourism will require maintaining strong international competitiveness, to intensify
linkages with other sectors in the economy, while ensuring its development all over the territory. A coherent
and integrated national plan for the development of tourism can help to achieve these objectives. In this
respect, the government launched a EUR 6 billion plan to reactivate tourism in May 2021.
Indicators of macro-financial stability suggest Portugal’s economy is more resilient than in past major crises
(Figure 1.12). However, the escalation of the health crisis could trigger tail events that would affect
economic prospects significantly (Table 1.2). Resilience of Portuguese firms, which are in relatively large
proportions very small and undercapitalised, and thus more vulnerable to shocks, is another source of
uncertainty. A higher than projected rise in insolvencies could dent economic prospects, thus the capacity
of public policies to provide adequate support is essential.
Current prices
(billion EUR)
Gross domestic product (GDP) 205.2 2.7 -8.4 4.8 5.8 2.8
Private consumption 131.9 3.3 -7.1 4.5 4.6 1.9
Government consumption 34.8 2.1 0.4 4.3 2.9 1.3
Gross fixed capital formation 36.0 5.4 -2.7 5.7 8.1 8.5
Housing 6.4 1.4 -6.6 1.7 6.8 4.4
Final domestic demand 202.7 3.4 -5.0 4.7 5.0 3.1
Stockbuilding1 1.6 -0.3 -0.6 0.2 0.0 0.0
Total domestic demand 204.2 3.1 -5.5 4.9 4.9 3.1
Exports of goods and services 89.1 4.1 -18.6 9.2 10.5 4.6
Imports of goods and services 88.2 4.9 -12.1 9.2 8.0 5.3
Net exports1 0.9 -0.4 -2.9 -0.2 0.8 -0.4
Other indicators (growth rates, unless specified)
Potential GDP .. 1.9 1.9 1.8 1.7 1.7
Output gap2 .. -1.0 -11.0 -8.4 -4.7 -3.7
Employment .. 1.2 -1.9 2.3 1.3 0.8
Unemployment rate3 .. 6.6 7.0 6.9 6.7 6.5
GDP deflator .. 1.7 1.9 0.9 1.4 1.2
Harmonised consumer price index .. 0.3 -0.1 0.8 1.7 1.1
Harmonised core consumer price index .. 0.4 -0.2 0.1 1.6 1.1
Household saving ratio, net4 .. -2.2 3.5 2.4 -1.1 -2.0
Current account balance5 .. 0.4 -1.1 -1.0 -0.6 -0.9
General government fiscal balance5 .. 0.1 -5.8 -4.3 -2.4 -1.6
Underlying general government fiscal balance2 .. 0.6 1.9 -0.6 -1.1 -1.1
Underlying government primary fiscal balance2 .. 3.4 4.3 1.6 0.8 0.7
General government gross debt (Maastricht)5 .. 116.6 135.2 133.4 128.3 125.8
General government net debt5 .. 99.1 112.7 110.9 105.7 103.3
Three-month money market rate, average .. -0.4 -0.4 -0.5 -0.5 -0.5
Ten-year government bond yield, average .. 0.8 0.4 0.3 0.2 0.3
Note: 1. Each aggregate macro-financial vulnerability dimension is calculated by aggregating (simple average) normalised individual indicators
from the OECD Resilience Database. Individual indicators are normalised to range between -1 and 1, where -1 to 0 represents deviations from
long-term average (since 1970) resulting in less vulnerability, 0 refers to long-term average and 0 to 1 refers to deviations from long-term average
resulting in more vulnerability. Financial dimension includes: regulatory liquidity ratio, regulatory Tier 1 capital ratio, the return on assets, and
the return on equity. Non-financial dimension includes: household credit (% of GDP) and corporate credit (% of GDP). The asset market
dimension includes: growth in real house prices (year-on-year % change), and house price to disposable income ratio. Fiscal dimension includes:
government budget balance (% of GDP) (inverted), and government gross debt (% of GDP). External dimension includes: current account
balance (% of GDP) (inverted), and export performance (inverted).
Source: Calculations based on OECD (2021), OECD Resilience Database, March.
StatLink 2 https://stat.link/nvu9s8
Table 1.2. Low-probability events that could lead to major changes in the outlook
Shock Possible impact
Recurrent COVID-19 outbreaks due to Strengthening of containment measures and repeated local and national lockdowns could trigger a
ineffective vaccines against new variants. surge in bankruptcies and job losses.
Sharp rise in non-performing loans after Reduced profitability and liquidity in the banking sector could lead to credit crunch and subdued level
the end of public support measures. of investment.
Significant delays in the implementation of Persistently weak public investment would slow down the recovery.
the Recovery and Resilience Plan.
Policy support should continue, but adapt to the evolution of the pandemic
While relatively weaker than in the OECD on average, public support was sizeable and mitigated the
negative impact of the pandemic on the economy (IMF, 2021). Direct aid through subsidies or tax cuts was
substantially lower than in other EU countries, but state guarantees on loans were massively used (ESRB,
2021). Fiscal support should remain in place until the recovery is firmly underway. Job retention schemes,
benefit payments to the self-employed, income support for workers caring for children and tax deferrals
should continue as far as restrictions are in place. Loan and guarantee programmes should also be
pursued for firms affected by regulatory restrictions to ensure they can restart activity when possible.
As the pandemic evolves, the authorities should regularly reassess and adapt measures to support the
economy, finding the right balance between protecting firms and workers and encouraging the liquidation
of unviable activities. Furthermore, a durable recovery will require improving productivity growth and
reducing disparities in economic performance, not least by boosting the digital transformation and
addressing the digital divide (Chapter 2). Structural reforms recommended in this Survey can have a
substantial positive impact in the medium to long term. Box 1.2 presents estimates of the impact of a
selection of reforms discussed in this Survey on growth and fiscal balance.
Note: Policy scenarios presented in the table correspond to increasing i) the average number of years of schooling of the adult population
by 6 months in 15 years via increased participation in adult education, ii) ALMP spending as a share of GDP by 0.3 percentage point iii)
business R&D as a share of GDP by 0.4 percentage point, and iv) the Rule of Law indicator from the World Bank “Worldwide Governance
Indicators” from 1.14 to 1.4 (the OECD median).
Source: OECD calculations based on Guillemette and Turner (2018).
Note: These estimates roughly quantify the short-run annual fiscal impact of selected recommendations in this Survey. They are based on
the following assumptions: i) an increase in active labour market spending as a share of GDP by 0.3 percentage point, ii) an increase in
subsidies to business R&D as a share of GDP by 0.4 percentage point, iii) an increase in environmental taxation as a share of GDP to the
average of the top quintile of the OECD (from 2.6% to 3.6% of GDP), with most of the revenues used to compensate poor households and
to invest in electric mobility and public transportation.
Source: OECD calculations.
Despite a stronger position of firms when compared to the previous crisis, the small size, low capitalisation,
and high indebtedness of businesses suggest high insolvency and bankruptcy risks in Portugal following
the phasing out of public support to businesses and the end of the moratoria on bank credit payments and
insolvencies in 2021. According to recent estimates of the Bank of Portugal, moratoria covered around
28.5% of firms’ loans (around EUR 21.5 billion) as of end August 2021, just before the end of the moratoria
(Bank of Portugal, 2021b). To limit a surge in default, support measures are needed. First, Linha de Apoio
à Recuperação Económica (LARE) Retomar was launched in September 2021, as a new support measure
for economically viable firms operating in the most affected sectors, which aims to provide an additional
relief of debt repayment, by restructuring credit operations in moratorium, introducing a new principal grace
period and maturity extension. In addition, Portugal’s Recovery and Resilience Plan includes measures to
support firms’ recapitalisation, aiming at restoring firms’ financial autonomy and fostering productive
investment (see below).
Support measures should target viable firms in sectors more affected by the containment measures.
Banks’ expertise could be used to identify firms to which they are exposed and that are still viable, but
have liquidity constraints. The government could develop a common framework to assess the viability of
firms and complementary measures needed to address the short-term solvency of viable firms. This could
be for example delaying the main payments of loans guaranteed by the State, agreeing on some
restructuring of unpaid social contributions, or increasing the maturity of State-guaranteed loans, in line
with the prudential framework. However, this last measure would require renegotiating the conditions of
this State aid measure with the European Commission. When doing so, it is crucial not to delay debt
restructuring as this could weigh on bank lending capacity (see below).
A number of policy options promoting equity and quasi-equity financing can flatten the curve of crisis-
related insolvencies and lessen the risk of debt-overhang (Demmou and al., 2021). Portugal has already
a number of non-debt funding instruments in place, such as fiscal incentives for firms to undertake equity-
type capital injections, a regulatory framework for Investment Funds and a mechanism of conversion of
loans to equity, but their scope has been modest. More needs to be done to expand the availability of non-
debt instruments. The package of financial instruments to support firms’ capitalisation and investment
envisaged under the Recovery and Resilience Plan includes the development of the National Promotional
Bank, Banco de Fomento. It manages a total amount of EUR 1.3 billion that can be invested in viable firms
in the form of equity and quasi-equity. The package under the Plan also includes a reform of the capital
market for promoting the capitalisation of non-financial companies with particular emphasis on investment
firms, and envisages regulatory and administrative simplification and capitalisation incentives such as
deduction for retained and reinvested earnings, to be completed by 2025.
The creation of a public equity fund, like in Spain, can contribute to stimulating non-debt funding. Its
effectiveness would depend on developing a credible exit strategy of public funds and monitoring the
associated contingent liabilities (OECD, 2020b). State contingent loans for which repayments are
conditioned on future returns, like in France with the “participative loans”, can help small firms that do not
have access to equity markets to recapitalise. Similar to equity, such loans are subordinated to other debts
and their returns are linked to profits. They have a relatively long maturity, and can include State
guarantees and higher interest rates to attract private financing. In Portugal, the possibility to introduce
participative loans has been examined by regulators and stakeholders. Converting loans into grants, under
a number of conditions, as done in the US or in Germany, is a more direct way to reduce debt of distressed
firms. Portugal has already provided non-refundable grants to firms, notably to pay rents, which is welcome.
Nevertheless, room to expand the scope of such measures is small due to their high cost and the limited
fiscal space.
The COVID-19 pandemic jeopardises the recovery of investment by weighing on firms’ profitability and
capacity to invest. In 2020, private investment dropped by around 16%. Before the pandemic, private
investment was already relatively low, undermining the adoption of new technologies, especially in SMEs
(see Chapter 2). The deterioration of economic conditions risks deepening this performance gap by
undermining capital acquisition. Foreign direct investment flows can be affected negatively, as FDI
prospects are weak in some sectors, including the automotive and the aeronautic sectors (EY, 2020). The
pandemic has put a drag on firm creation in 2020, which was subsequently reversed but has not reached
to pre-crisis levels yet. Weak firm dynamics could have long-lasting effects on growth potential, as new
entrants tend to bring innovation, use more intangible capital and increase market contestability (Calvino,
Criscuolo and Menon, 2016).
Policies should sustain investment, especially in new firms. A key issue is investment funding. Weakening
balance sheets, increasing financing constraints and high uncertainty have complicated access to finance,
especially for SMEs that lack collateral and for intangible investment (Demmou and al., 2021). Despite
extensive public support to credit supply (i.e. state guarantees, see Box 1.1), financing conditions have
worsened for higher risk companies. Credit standards tightened in response to the economic outlook, a
deterioration in borrowers’ creditworthiness and a decline in risk tolerance (Bank of Portugal, 2020b).Banks
– the main external financing sources for businesses – apply tight collateral requirements, restricting the
supply of unsecured loans. Under these circumstances, firms benefited from publicly guaranteed credit
lines. Between March 2020 and March 2021, the stock of loans of companies that resorted to publicly
guaranteed credit lines increased significantly. Overall credit standards have been eased since early 2021
and currently standing close to pre-crisis levels (Bank of Portugal, 2021d).
Policies that improve the availability of long-term market-based financing can support the recovery of
investment. As detailed in Chapter 2, alternatives to bank financing are missing in Portugal, which has
been a barrier to access to finance already before the crisis, especially for small innovative firms (European
Investment Bank, 2019). Options to diversify financing sources include introducing schemes for equity-
type capital injections directed to SMEs, as equity markets for SMEs are lacking. Other possible measures
include the establishment of funds as done for instance in France with the “Fonds de renforcement des
PME” or the BPI France Entreprises or the setup of convertible bonds as done in the UK. Developing a
special framework for private bond placements by small companies following successful examples in
Europe could also be envisaged (e.g. the mini-bond market in Italy). Initiatives to improve awareness on
equity instruments among entrepreneurs and incentives for investors can accelerate the development of
equity finance. Finally, reducing costs and streamlining listing requirements can facilitate access to equity
markets for smaller firms, as stressed in the 2020 OECD Capital Market review (OECD, 2020c). Portugal’s
Recovery and Resilience Plan envisages reforms to develop capital markets, including the revision of the
legal framework for collective investment undertakings and of incentives to capitalisation.
Public investment in growth-enhancing areas, such as digitalisation, environment, education and health
care, can boost productivity from current low level and inclusiveness (see Figure 1.4, Chapter 2). However,
public investment, at around 2% of GDP, was among the lowest in the OECD in 2019 and in 2020, despite
an increase in response to the pandemic (Figure 1.13). Over the past decade, subdued public investment
has been part of the fiscal consolidation strategy that focused on the headline deficit with only limited
structural improvement (Weise, 2020).
Figure 1.13. Public investment has declined in the past decade
A. Components of public expenditure B. Public investment
2020 or latest available²
% of GDP % of GDP % of GDP
8 60 7
Government fixed capital formation
7 Gross interest payments 55 6
Current expenditures (rhs)¹
6 50
5
5 45
4
4 40
3
3 35
2
2 30
1 25 1
0 20 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
ISR
ITA
FIN
SVK
JPN
MEX
DEU
GRC
CHE
GBR
NLD
FRA
KOR
NOR
HUN
PRT
ESP
BEL
AUT
COL
DNK
USA
AUS
CAN
POL
CZE
SWE
EU22
OECD
Note: 1. Current expenditures includes government final consumption, social security benefits, property income and other outlays. 2. Data for
Colombia, Israel, Mexico and Switzerland refer to 2019.
Source: OECD (2021), OECD Economic Outlook: Statistics and Projections.
StatLink 2 https://stat.link/jy9mnx
EU funds will help to increase public investment. Portugal will receive around EUR 61 billion over 2021-
29, in particular from the Recovery and Resilience Facility and the Cohesion Policy funds (Figure 1.14).
While Portugal has been successful in using EU funding so far and has experience with financial assistance
programmes, absorption might be slow due to hurdles in designing, approving and implementing
programmes. Portugal has already received EUR 2.2 billion (1% of GDP) in pre-funding and is expected
to absorb 1.2 billion in 2021. Portugal will have to develop administrative capacities to accelerate the
management of the funds. Reducing red tape and streamlining administrative processes in the public
procurement system, while ensuring high levels of transparency and accountability to prevent the risks of
fraud, would also help to speed up the execution of planned investment.
Figure 1.14. Portugal will receive large amounts of EU funds
Total allocation, 2020
% of GDP % of GDP
25 25
European Structural Funds (Cohesion Policy) Recovery and Resilience Facility (grants)
20 20
15 15
10 10
5 5
0 0
LUX IRL DNK NLD SWE AUT DEU FIN BEL FRA ITA ESP SVN CZE EST LTU PRT POL ROU SVK HUN LVA GRC
Note: “European structural funds (Cohesion Policy)” stand for the European Social Fund, the European Regional Development Fund, the
Cohesion Fund, and support for the European Territorial Co-operation. Total allocation over the period 2021-27 in current prices is expressed
as a % of 2020 GDP. “Recovery and Resilience Facility (grants)” refers to the maximum grant allocations over the period 2021-26, which is
expressed as a % of 2020 GDP.
Source: OECD calculations based on European Commission (2021) “The EU’s 2021-2027 long-term budget & Next Generation EU, Facts and
figures”.
StatLink 2 https://stat.link/dbluif
Portugal’s Recovery and Resilience Plan presents the main orientations for the use of the Next Generation
EU funds. The main areas for investment and reforms coincide with those highlighted in past and present
Surveys (Box 1.3). In line with EU guidelines, the plan dedicates 38% of the budget to measures
addressing environmental challenges and 22% contributing to the digitalisation of the economy. The plan
aims at strengthening economic, social and territorial resilience by reducing social vulnerabilities, raising
the national productive potential and ensuring competitive and cohesive territory. The implementation of
the plan is underpinned by a specifically designed governance, the structure of which is considered to be
adequate (European Commission, 2021a). It consists of a coordination body chaired by the Prime Minister
(the Inter-ministerial Commission), monitoring mechanisms associating also relevant stakeholders outside
the government, and an audit and control mechanism.
Portugal will have to execute a significantly larger amount of EU funds over the next years than in the past,
representing both an opportunity and challenge in terms of programming, complementarity of instruments,
management capacity, audit responsibility and successful and impactful execution (European
Commission, 2021a). Also, the implementation of the plan is supposed to be coordinated with that of the
Partnership Agreements for 2021-27 (for the Cohesion Policy) under a broader economic and social
strategy ‘Estratégia Portugal 2030’. Therefore, the coordination between the monitoring mechanisms for
the plan, the Development and Cohesion Agency in charge of all EU funds, and the Ministry of Finance in
charge of formal interactions with the European Commission will be crucial. The launch of a platform (i.e.
the “More Transparency Portal”) that aims at improving the transparency of the European funds’ execution
process by providing clear and relevant information to citizens in April 2021 is a welcome step. The
effective implementation of the plan should ensure value for money and reduce the risk of fraud. It will be
also important to keep monitoring the costs and benefits of projects, favour those that have the highest
economic and social returns, and to ensure funds will finance projects that would not have been carried
out in the absence of public co-funding.
The insolvency regime and the judicial system will have to adapt to ensure a rise in insolvencies will not
excessively increase delays in proceedings nor lead to the exit of viable firms. Lengthy insolvency
procedures reduce the chance of survival and lower the liquidation value of failing firms (Adalet McGowan
and Andrews, 2018). This could induce a fall in debt recovery from relatively low levels (Figure 1.15, Panel
A), increasing credit risks and further deteriorating financing conditions. At the same time, speeding up
procedures when courts get congested decreases efficiency and can lead to the liquidation of viable firms
(Iverson, 2018).
ITA
GRC
GRC
performing
PRT
ESP
performing
performing
ESP
PRT
performing
OECD
OECD
Worst
Worst
Best
Best
Note: The recovery rate is calculated based on the time, cost and outcomes of insolvency proceedings and is recorded as cents on the dollar
recovered by secured creditors.
Source: World Bank Doing Business Indicator 2020.
StatLink 2 https://stat.link/fxph7j
While the average time needed to resolve civil and commercial cases has continued to decline and is now
close to the EU average, the estimated duration of insolvency proceedings remains well above the OECD
average (Figure 1.15, Panel B). The backlog of old insolvency cases remains high (64% of cases closed
in 2020 were pending for over 5 years) and is likely to increase should the number of cases surge as
expected. Improving judiciary efficiency is key to shortening procedures, while improving the quality of
court decisions. In line with past OECD recommendations, measures have been put in place (i.e. the
Tribunal+ project, Table 1.5), but their benefit might take time to materialise. In the medium run, resources
in the court system need to increase, for instance by adding new temporary judges on insolvency
procedures or by accelerating the hiring of judges’ assistants as envisaged in the Recovery and Resilience
Plan. Increasing the managerial autonomy of the courts can contribute to a better allocation of resources.
Effort should also concentrate on developing digital tools for the workload assessment further. Plans to
improve electronic processing of procedures are welcome (Table 1.5). A single platform for case
management, integrating both judicial and alternative mechanisms for dispute resolution, can support
effective triage of cases and help with court congestion (OECD, 2020d).
The use of out-of-court procedures should be encouraged to prevent court congestion and fasten
procedures. The insolvency framework has improved significantly in that respect since the global financial
crisis, with the introduction of early warning mechanisms and pre-insolvency procedures for restructuring
(Jin and Amaral-Garcia, 2019). However, only around 200 firms were restructured under out-of-court
mechanisms in 2018-19. A new recovery process for firms affected by the COVID-19 pandemic (PEVE)
and a public system of alternative dispute resolution for natural persons (SISPACSE) have been
introduced. The Recovery and Resilience Plan foresees further reform of the insolvency regime, notably
to simplify procedures. Judicial staff should be encouraged to orient users to the out-of-court mechanisms,
when appropriate, as done in the UK or Germany. Establishing a unique judicial portal for businesses that
provides legal information and advice can increase awareness of available options for restructuring
(OECD, 2020d). Finally, as recommended in previous Economic Surveys, financially attractive out-of-court
schemes for firm liquidation should be introduced and exit costs on entrepreneurs reduced to create the
right entrepreneurial environment of a “second chance” (Table 1.5).
Table 1.5. Past OECD recommendations on improving judicial efficiency and insolvency regime
Recommendations in past surveys Actions taken since 2018
Increase the managerial autonomy of the courts so that they can No action taken
effectively allocate resources such as judges, other judiciary staff and
budgets.
Fully analyse the data collected from the information system on court The set of functionalities available in CITIUS has expanded. The
proceedings (CITIUS) so that it allows the courts to identify problematic Activity Management module, that allows the monitoring of court
cases and those that should be prioritised. activity and facilitates the allocation of cases, has been available in
all first instance courts and in the Supreme Court since 2019 and will
be extended to other courts in 2021.
Improve the CITIUS information system by extending on-going efforts on The exclusivity of electronic processing at the trial stage and the
digitalisation. provision of electronic notifications have been established in all
courts. Legal procedures can be consulted online and judicial
certificates can be issued by electronic means. Dematerialized
communication of insolvency court decisions are in place. Two new
information systems are under development.
Introduce an out-of-court mechanism to facilitate the liquidation of non- No action taken
viable firms.
Set up an independent supervisory body to ensure that regulations in the No action taken
legal profession are in the public interest.
Strengthen legal assistance to judges by increasing the specialisation of A revision of statute of judicial clerks is ongoing. The Prosecutor-
clerks and ensuring the organisation of clerks is flexible. Consider General's Office and the Superior Council for the Judiciary are
introducing assistant judges in lower level courts. currently developing tendering procedures for hiring advisors to the
judges and prosecutors of the lower courts.
Review the overall system of performance evaluation of judges with a view The revised evaluation system for judges and prosecutors has been
to ensuring its full objectivity. adopted in 2020.
Job retention measures have preserved employment relationships and sustained household income in
2020. They have been reinforced in response to the third wave of the virus, following the re-introduction of
lockdown measures at the beginning of 2021. They rightly target most affected firms, and include features
that limit the uptake by vulnerable ones. For instance, access to the “simplified lay-off” scheme has been
restricted to firms directly or indirectly affected by lockdown restrictions and conditioned to the maintenance
of employment for at least two months.
As the economic situation improves, firms’ contribution to the costs of hours not worked (currently around
20%) should gradually increase to strengthen incentives to use subsidies for jobs that are viable. Besides,
short-time work benefits are significantly more generous than unemployment benefits. The replacement
rate should be reduced, as it may discourage workers to look for another job, even when job survival is
uncertain (OECD, 2020e). In addition, the mobility of workers from subsidised to unsubsidised jobs can be
promoted by encouraging workers on short-time work to register with the public employment services. This
would allow workers at risk of displacement to benefit from their services, supporting their career
progression.
The short-time work scheme also included incentives for employers to provide training to workers with
reduced working hours. Unfortunately, the uptake has been low, reaching only 0.6% of the firms that
participated in the simplified lay-off scheme by the end of October 2021, with a similar result for the other
job retention scheme. While this is partly due to the difficulty of providing vocational training during
lockdowns, this also reflects the low capacity of firms, especially SMEs, to provide training (Chapter 2).
Effort to promote training should strengthen, targeting workers more at risk of losing their jobs.
Public employment services need to adapt to new circumstances surrounding unemployment and
inactivity. They will play a central role in the reallocation of workers across industries, firms and
occupations, as some sectors – including tourism – will likely continue to operate below pre-crisis levels
over the next few years. Fostering labour market participation, which stands below the OECD average for
men, will also be paramount to sustain long-term growth in a context of rapid population ageing. Portugal
has put a stronger emphasis on active labour market policies (ALMPs) before the pandemic as
recommended in past Economic Surveys (OECD, 2017a). In particular, direct and indirect support to job
creation has contributed to lower unemployment, while training measures (especially those provided for a
longer duration) have increased employability of jobseekers (OECD, 2019b; European Commission,
2020a). Following a significant increase since the beginning of the pandemic, spending on active labour
market policies per unemployed is still expected to remain below the 2019 OECD average in 2021
(Figure 1.16).
Figure 1.16. Spending on active labour market policies has increased substantially
A. Total ALMP spending per unemployed B. Public expenditure on public employment
Per cent of GDP per capita, 2019 service and administration
Per cent of GDP, 2019
65 71 180
40 0.40
Portugal 2020 Portugal 2021
35 0.35
30 0.30
25 0.25
20 0.20
15 0.15
10 0.10
5 0.05
0 0.00
ITA
FIN
ISR
IRL
ITA
FIN
LVA
JPN
FRA
CZE
LUX
NLD
JPN
PRT
CZE
NLD
FRA
USA
CAN
BEL
CHL
PRT
SVK
SVN
ESP
KOR
EST
AUT
CHE
OECD
HUN
POL
SWE
DEU
AUS
DNK
NZL
MEX
USA
SVK
KOR
HUN
CAN
CHE
OECD
NZL
DEU
DNK
POL
ESP
NOR
AUT
AUS
BEL
SWE
Note: Portugal 2020 and 2021 refer to the budget allocation to public employment services for active labour market policies in 2020 and 2021,
including incentives for the resumption of activity.
Source: OECD (2020), Economic Outlook database and Statistics on Labour Market Programmes database, Ministry of Labour.
StatLink 2 https://stat.link/m98r4h
The effectiveness of ALMPs largely relies on the capacity of the public employment services. In Portugal,
the share of jobseekers in regular contact with the public employment services is among the lowest in the
OECD and only around 35% of jobseekers used their services to find a job in 2018 (European Commission,
2020a). Resources in public employment services have been relatively low (see Figure 1.16, Panel B).
They should be targeted at improving job search support and counselling on training, which would be most
useful to address the expected increase in unemployment. Public employment service staff workload is
heavy and varies across regions. This undermines the implementation of a case management system with
individualised guidance (Düll et al., 2018). Raising the number of career managers would improve the
effectiveness of the personal employment plans, particularly in regions with higher unemployment or a
higher share of jobs potentially at risk (OECD, 2017a).
The digitalisation of public employment services needs to accelerate, as it can free up resources and thus
support caseworkers in coping with potentially fast increasing number of clients in the future (OECD,
2020f). During the COVID‑19 crisis, the use of online tools increased significantly in response to
containment measures, which gives good momentum to further structural transformations. Refining
statistical profiling tools can improve the targeting of activities in public employment services (Desiere,
Langenbucher and Struyven, 2019). Automated matching can minimise the need for caseworker
intervention. Finally, automation of procedures, such as registering jobseekers, processing unemployment
insurance benefits and the short-time working scheme, via exchange of data across administrations, like
in Estonia, could achieve large efficiency gains.
Training accounts for a large share of spending on ALMPs. This is welcome as the lack of skills is one of
the main barriers to employment in Portugal (Düll et al., 2018). Training should adapt skills needed for the
fast changing labour market and the digital transformation (see Chapter 2). Programmes, such as the
Digital Guarantee that aims at providing all jobseekers with digital training adapted to their level of
qualification and skills profile by 2023, are steps in the right direction.
Employment prospects have dramatically worsened for the youth, who already faced higher rates of
unemployment and underemployment before the pandemic (Figure 1.17). The capacity of public
employment services to reach out to the youth needs to improve, in particular to those who do not receive
unemployment or social assistance and have fewer incentives to register with public employment services
(ILO, 2019). Engaging young people, especially the most disadvantaged ones requires specific strategies.
For instance, experiences from other EU countries, such as Germany, Greece and Hungary, show that the
introduction of outreach services, such as job fairs organised in youth centres, or at the premises of training
centres, can be successful in enhancing youth engagement with public employment services (ILO, 2019).
Similarly, campaigns using social media and new technology used by young people can be effective
(OECD, 2017a). Portugal initiated an outreach strategy in 2018, with various channels of communication,
but the scope and the coordination of programmes need to improve (European Commission, 2020b).
Figure 1.17. Unemployment is particularly high for young people
A. Unemployment is high for young people B. Job losses were concentrated on young and
Unemployment, 15-24 year-olds temporary workers
% of labour force 2019Q4 = 100
40 120
October 2021 or latest
35
December 2019 110
30
100
25
20 90
15 Total employment
80
10 Employment under temporary contract
70
5 Employment of workers under 25
0 60
18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3
ITA
JPN
TUR
SWE
CZE
DEU
MEX
NLD
KOR
USA
CAN
AUS
GBR
FRA
GRC
POL
CHL
ESP
BEL
PRT
COL
OECD
Source: OECD (2021), OECD Labour Force Statistics (database) and Statistics Portugal, Labour force survey (Series 2021).
StatLink 2 https://stat.link/jis9u0
Workers with non-standard work contracts, who are poorly covered by conventional social protection and
other forms of income smoothing, are likely to be disproportionately affected by the pandemic (ILO, 2020).
Portugal extended access to unemployment benefits, which increased the coverage of unemployment
insurance and provided temporary support to jobseekers without social protection, but the regulatory
framework of unemployment benefits has not yet fully adapted to the specific needs of workers in non-
standard forms of employment. Providing income support to jobseekers, especially to those with short or
irregular employment history, can limit poverty risks and improve the quality of matching on the labour
market, as jobseekers can devote more time to find a job that match their competences (Wulfgram and
Fervers, 2013; Tatsiramos, 2009). Portugal should consider easing its strict eligibility criteria for
unemployment benefits. For instance, social unemployment benefits are restricted to jobseekers with 6
months employment history and strictly means tested. Employment requirements need to be reduced.
Opening unemployment assistance to all jobseekers like in the United Kingdom and Finland would also
diminish the risk of large income losses for those with patchy employment history.
Ensuring a sustainable recovery requires preventing the build-up of large macroeconomic vulnerabilities.
Sustainable levels of public debt improve the resilience of the economy, by increasing governments’ room
of manoeuvre to mobilise fiscal policy during recessions and by reducing the risk of default (Fall and
Fournier, 2015). The quality of public finances is also paramount, due to its significant impact on growth
(Fournier and Johansson, 2016). Improving the efficiency of public spending and removing distortive taxes
can contribute to a growth-friendly debt reduction strategy. In the same vein, a robust financial system is
key to ensure effective monetary policy transmission and adequate access to finance, even when
economic conditions deteriorate.
Like in all OECD countries, the COVID-19 crisis has triggered a deterioration of public finances in Portugal,
widening the fiscal deficit to 5.8% of GDP in 2020. Public debt increased to the record high level of 135%
of GDP (Figure 1.18). Demographic changes will further weigh on public finances in the medium term
(European Commission, 2021b). According to OECD projections, primary government expenditure could
rise by over 4% of GDP by 2060, with more than half of the increase coming from healthcare (Guillemette
and Turner, 2018). Not compensating for higher ageing costs could push the debt level above 150% of
GDP by 2050 (Figure 1.19). By contrast, gradual fiscal consolidation combined with policies fostering GDP
growth could put public debt on a more sustainable path.
Fiscal risks have expanded due to large increases in contingent liabilities. State guaranteed credit line
covered around 12% of loans granted to non-financial corporations in March 2021, totalling EUR 9 billion
(Bank of Portugal, 2021a). They were mostly and rightly directed to firms with pre-crisis good
creditworthiness in the most affected sectors (Bank of Portugal, 2020b and 2021a). Nevertheless, they
have widened off-balance-sheet liabilities and increased State exposure to a potential wave of corporate
defaults. The execution of the guarantees can be large if the economic recovery is slow in the hospitality
and the transport sectors as projected. In the same vein, capital injections in private companies, like for
instance in the national aviation company TAP, could generate high costs, if the supported firms do not
recover. Finally, debt rules for local governments have been relaxed temporarily to allow for emergency
spending, increasing the risk of over indebtedness in municipalities with pre-existing financial difficulties.
% of GDP % of GDP
240 240
2020 2019
200 200
160 160
120 120
80 80
40 40
0 0
LUX CZE SWE NOR DNK LVA LTU NLD POL SVK FIN IRL DEU HUN SVN AUT EU22 FRA BEL ESP PRT ITA GRC
B. Harmonised long-term sovereign interest rate spreads over the benchmark rate of Germany
% pts. % pts.
14 14
Portugal Italy Spain
12 12
10 10
8 8
6 6
4 4
2 2
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
In this context, Portugal should design and make public a credible strategy for debt reduction over the
medium term in line with EU fiscal rules. The government plans a progressive decline in the public deficit
to below 3% of GDP by 2023 on the back of the economic recovery, the gradual phase out of COVID-19
related measures and the containment of public spending. However, the strategy for cost containment is
unclear. In the past, fiscal consolidation happened through cuts in public investment and was not
accompanied by a strategic reallocation of spending to priority areas (European Commission, 2020a). The
strategy needs to contain escape clauses to avoid that maintaining this deficit objective despite slower
growth leads to a pro-cyclical fiscal stance.
Figure 1.19. Sustained primary budget surpluses are needed to durably lower public debt
Gross government debt as a share of GDP
% %
180 180
160 160
140 140
120 120
100 100
80 80
Not offsetting increase in age-related costs
60 60
Offsetting increase in age-related costs
40 40
Offsetting increase in age-related costs + structural reforms
20 20
0 0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Note: The "not offsetting increase in age-related costs" scenario consists of the Economic Outlook N°109 projections and includes European
Commission projections for net total ageing costs (net public pensions, long-term care, health, and education adding 3.3% of GDP to annual
public spending in 2050 compared to 2023). In the "offsetting increase in age-related costs" scenario, the primary balance is projected to
gradually improve until 2026 and is kept constant afterwards at 0.5% of GDP. The “offsetting increase in age related costs + higher GDP growth”
scenario assumes that GDP growth is 1 percentage point higher over the projection period, starting from 2023 and a gradual improvement of
the primary balance, kept constant after 2026 at 0.5% of GDP.
Source: Adapted from OECD (2021), OECD Economic Outlook: Statistics and Projections (database), June; Guillemette, Y. and D. Turner
(2018), "The Long View: Scenarios for the World Economy to 2060", OECD Economic Policy Paper No. 22., OECD Publishing, Paris; and
European Commission (2021), "The 2021 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2016-2070)"
Directorate-General for Economic and Financial Affairs.
StatLink 2 https://stat.link/fidvp5
In the short run, restricting support measures to sectors and individuals affected by the pandemic would
contain fiscal costs. As a matter of principle, firms that cannot fully operate due to containment measures
should continue receiving financial support. At the same time, measures, especially capital injections,
should target firms with strong business models and good corporate governance to the extent possible.
Future state support to private companies should be allocated after a thorough evaluation that involves
experts from the private sector. Quasi-equity injections (preferred equity), that provide a senior claim to
dividends and assets in case of liquidation, and allow companies to raise funds without diluting control,
should be favoured to limit risks to the taxpayer. In addition, to promote the transition to a greener economy,
public support should prioritise environmentally sustainable activities, and, when possible, be conditioned
to achieving environmental objectives.
In the longer term, limiting future increases in ageing costs will be challenging. Portugal has a public pay-
as-you-go earnings related pension scheme and some voluntary private pensions whose share in overall
pensions is small. Portugal has already implemented a panel of reforms that improve the sustainability of
the pension system, although these reforms came at the cost of shifting most of the burden on future
generations (OECD, 2019b). The statutory retirement age increases in line with the evolution of life
expectancy and pathways into early retirement have also been restricted. However, the COVID-19 crisis,
especially via its impact on the labour market, has reduced social security contributions and can increase
the number of older workers eligible to social benefits. The government is considering new financing
sources. Other options to reinforce the sustainability of the pension system include the application of the
sustainability factor to all pensions and increasing the minimum age for early retirement in line with life
expectancy (OECD, 2019c). Increasing progressivity in the public pension system could compensate for
induced cuts in low pensions such reforms could generate. Finally, as stressed in the previous Economic
Survey and the OECD Pension Review, pathways to early retirement should be eliminated (OECD, 2019c
and 2019c). In the healthcare sector, planned measures to improve governance and cost efficiency in
hospitals should resume once the pandemic is contained. At the same time, improving access and quality
of health and long-term care will require additional public resources (see below).
As stressed in previous Economic Surveys, and to seize the full benefits of available EU funds, improving
public spending efficiency is a priority (OECD, 2017a). Doing so requires modernising the budget
framework by developing performance budgeting and medium-term planning. Portugal initiated an
ambitious reform in 2015, with the Budget Framework Law, but enforcement was delayed, due to
governance and expertise issues. In December 2019, only two out of the 21 projects required for the reform
had been completed (Tribunal de Contas, 2020). Implementation needs to accelerate, by imposing
medium-term targets, closely monitoring progress and allocating adequate human and technical
resources.
Portugal should take stock of overall expenditure and reassess its alignment with fiscal objectives and
national priorities. Following OECD best practice, a major step would be to establish coordinating entities
in each ministry in charge of budget execution, providing them with guidelines for setting programme
objectives and assessments of targets (OECD, 2018a). This would free up resources in the Ministry of
Finance for the analysis of the financial performance of programmes. Broadening the collection of
performance information and developing evaluation capacity is another necessary condition. Performance
information is unevenly collected and data are not sufficiently used as a strategic asset to serve citizens
(OECD, 2017b; OECD, 2020g). Improving the public administration data ecosystem is one priority of the
new Strategy for Innovation and Modernisation of the State and Public Administration 2020-2023. To
strengthen transparency on the use of public money and provide information on the quality of public
services, the administration operates multiple online portals (i.e. Health Service Transparency Portal,
Justice Transparency portal, Municipal Transparency Portal). The integration of information collected by
different administrations has improved through the data interoperability platform (OECD, 2019d).
Implementation of the Strategy is challenging however, due to a lack of financial and human resources.
Large funds under Portugal’s Recovery and Resilience Plan will be allocated to the modernisation projects
(Box 1.3), but difficulties in recruiting and retaining skilled professionals risk delaying their implementation.
Medium-term budgeting is central for public finance sustainability as it defines concrete actions a
government will take to achieve fiscal objectives by subsectors and policy areas, highlights the budget
impact of policy initiatives and provides certainty over fiscal envelopes allocated to ministries. In Portugal,
medium-term fiscal plans are not binding, temporarily due to a transitional rule of the Budgetary Framework
Law, and deviations from plans within a year were frequent even before the pandemic. Furthermore,
estimated impacts of policy decisions on the budget are not detailed. The Fiscal Council, the body in charge
of monitoring the adequacy of the budget with national and EU rules, regularly points to the lack of
information and incoherence in the budget documentation. The budget administration needs to devote
more resources to the provision of timely, transparent and comprehensive information on the draft budget
(OECD, 2019e). Following past OECD recommendations, the Fiscal Council will reinforce its analyses of
medium-term fiscal projections, including on the sustainability of the social security system, to provide an
independent assessment of policy decisions that have a long-term impact on public finances (OECD,
2019e).
Tax revenue has increased over the past decade and exceeded the OECD average in 2019 (Figure 1.20).
Instead of raising tax rates, priority should be given to rebalancing the tax mix. Revising the tax composition
can foster economic growth, by reducing taxes most harmful to growth and inclusiveness (Johansson,
2008; Brys et al., 2016). Reductions in the corporate income taxation to stimulate investment should be
carefully evaluated and reinforced if found insufficient. In the longer run, size-contingent tax rates should
be reviewed, as they may hamper growth of small firms when the recovery will be underway (OECD, 2019b
and Chapter 2). There is room to increase taxes on immovable property and inheritance taxes, as they are
relatively low by OECD norms (Figure 1.20, OECD, 2021b). Taxes on polluting sources could also increase
to reflect their negative impact on the environment (see below). The government plans to revise the rural
property and vehicle taxes, but details on the measures are not available yet.
Figure 1.20. Increasing property taxes would improve the tax mix
A. Tax revenues B. Property tax revenues
2019 or latest available 2019 or latest available
% of GDP % of GDP
50 5
40 4
30 3
20 2
10 1
0 0
Lowest OECD OECD Portugal Peers Highest Lowest OECD Portugal OECD Peers Highest
country OECD country country OECD country
The fiscal consolidation strategy should include a revision of special provisions in the tax system. Tax
expenditures accounted for 6.2% of GDP in foregone tax revenues in 2019 and reform to improve their
effectiveness should be considered. Among more than 500 existing tax expenditures, 120 do not have a
clear objective (Grupo de Trabalho para o Estudo dos Benefícios Fiscais, 2019). While taxpayers have
access to online and prefilled tax declaration, paying tax remains lengthier than in most OECD countries
and the time taken to prepare and pay taxes has not declined since 2016 (World Bank, 2020). Previous
Economic Surveys pointed to the need to simplify the tax system by reducing the use of special provisions
(e.g. tax exemptions and special rates), as they make the tax system complex and less transparent
(Table 1.6). Tax exemptions and targeted tax cuts have increased to support those most affected by the
COVID-19 crisis (see Box 1.1). When the recovery is underway, they should be streamlined and the
process of tax simplification should resume.
The banking sector entered the coronavirus crisis in a significantly stronger position compared to the last
financial crisis (IMF, 2019; OECD, 2019b). Its funding structure has become more stable, with increased
deposits and equity financing and less reliance on funding from securities and interbank markets. Capital
and liquidity ratios had improved, strengthening banks’ resilience to absorb losses against a deterioration
in asset quality (Figure 1.21, Panel C and D). In addition, banks had made significant progress in reducing
operational costs and in strengthening their balance sheets, with non-performing loans (NPLs) falling
significantly and returning to levels close to 2008 (Figure 1.21, Panel A and B). Policy support to the
financial sector following the pandemic has been significant, notably through the relaxation of the use of
capital and liquidity buffers, and higher flexibility in accounting rules and computation of regulatory capital.
It contributed to containing near-term financial stability risks and supported banks’ lending capacity.
20 4
15 3
10 2
5 1
0 0
2008 2010 2012 2014 2016 2018 2020
ITA
JPN
CHL
NLD
FRA
TUR
AUS
CZE
PRT
KOR
CAN
DEU
USA
GBR
MEX
CRI
ESP
GRC
BEL
OECD
POL
COL
C. Liquidity coverage ratio D. Regulatory tier 1 capital to risk weighted
2021Q2 assets
% % 2021Q2 or latest available
500 20
450 18
400 16
350 14
300 12
250 10
200 8
150 6
100 4
50 2
0 0
FIN
IRL
ITA
ITA
LTU
CRI
JPN
FRA
DEU
LUX
NLD
KOR
CAN
AUT
ESP
GRC
BEL
EST
PRT
SVN
CHL
AUS
USA
COL
ESP
GRC
TUR
MEX
FRA
DEU
GBR
PRT
POL
BEL
OECD
Source: Banco de Portugal (2020), BPstat Database and IMF (2021), Financial Soundness Indicators, and ECB (2021), Statistical Data
Warehouse, European Central Bank.
StatLink 2 https://stat.link/gfa813
However, remaining vulnerabilities and a challenging environment could test the resilience of the
Portuguese banking sector. Firstly, the level of troubled assets remains one of the highest in the OECD
(Figure 1.21, Panel B) and risks increasing further in the medium term. Secondly, banks’ profitability has
deteriorated and is very low (Figure 1.22, Panel B). In an environment characterised by low interest rates,
high competition, and an expected increase in credit losses, Portuguese banks may find it increasingly
difficult to restore profitability. This is worrisome, as low profit margins, by limiting banks’ ability to preserve
capital during economic turmoil, pose a risk to credit supply. Thirdly, Portuguese banks are exposed to
sovereign debt, with government bonds accounting for 16.2% of their assets at the end of 2020 (Bank of
Portugal, 2021a). Increases in sovereign spreads, following for instance a deterioration of investors'
confidence in the sustainability of Portuguese public finances, could significantly weaken banks’ financial
position. At the same time, risks are mitigated by the relatively high share of public debt in banks´ balance
sheet classified at amortised cost and immune to change in yields (47%).
Figure 1.22. Corporate indebtedness and weak profitability are important vulnerabilities
A. Corporate debt B. Return on Equity
2021Q1 Per cent, 2021Q2 or latest available
% of GDP %
200 16
180 14
160
12
140
120 10
100 8
80 6
60
4
40
20 2
0 0
ITA
ISR
FIN
COL
POL
ESP
IRL
ITA
CZE
ISL
CZE
AUS
TUR
HUN
DEU
USA
JPN
CAN
NLD
FRA
DEU
LUX
FRA
POL
DNK
NLD
AUT
PRT
CHL
PRT
SVK
LTU
LVA
SVN
ESP
HUN
MEX
GRC
GBR
KOR
BEL
BEL
EST
AUT
NOR
SWE
SWE
OECD
EU
Source: Bank for International Settlements (BIS); and European Banking Authority (EBA) “EBA Risk Dashboard”.
StatLink 2 https://stat.link/piw0ms
The pandemic has increased financial risks in the corporate sector. Despite deleveraging efforts in the
past, corporate debt levels remain relatively high and increased again during the pandemic (Figure 1.22).
This is mainly due to loan guarantee schemes and the moratorium on bank loans repayments introduced
to prevent liquidity pressures turn into insolvency and the drop in nominal GDP (Bank of Portugal, 2020b).
Between March 2020 and March 2021, approximately 30% of new loans to non-financial corporations were
issued through state guaranteed credit lines (Bank of Portugal, 2021a). In addition, Portuguese banks had
one of the largest shares of loans under moratoria across Europe (Figure 1.23). At the end of August 2021,
28.5% of bank loans to non-financial corporations were under moratoria, but this amount declined
substantially with the phase out of the moratorium in September 2021 (Bank of Portugal, 2021b). Estimates
of the Bank of Portugal point to a significant increase in vulnerable firms’ debt and excess debt in 2020,
but below levels observed during the sovereign debt crisis (Bank of Portugal, 2020b).
Figure 1.23. A large share of loans were under moratoria
A. Loans and advances with non-expired B. Newly originated loans and advances
EBA-compliant moratoria subject to public guarantee schemes
Per cent of all loans and advances¹ Per cent of all loans and advances¹
% %
25 6
June 2021 June 2021
20 5
September 2020
September 2020 4
15
3
10
2
5 1
0 0
NLD
FRA
LUX
FIN
NLD
FIN
FRA
ITA
EST
AUT
IRL
ITA
LUX
PRT
IRL
AUT
PRT
LTU
LVA
ESP
LVA
EST
LTU
BEL
DEU
BEL
GRC
POL
SVK
SVN
HUN
SWE
SWE
SVN
DEU
SVK
HUN
GRC
POL
ESP
Note: 1. Gross carrying amounts, other than trading exposures. Computed ratios could be subject to some imprecision due to slight differences
in the sample of banks reporting numerator and denominator.
Source: EBA (2021), Risk Dashboard.
StatLink 2 https://stat.link/5ng0wk
In the absence of further policy support, the phase out of support measures, especially of the public
moratorium in September 2021, could translate into a sharp increase in default rates on the back of fragile
corporate fundamentals and weakening debt-servicing capacities. Banks’ loan loss provisions increased
markedly in 2020. Nevertheless, under the Single Supervisory Mechanism, high variability in the expected
losses booked across banks that might reflect inadequate provisioning by some banks, in part due to
profitability constraints, calls for thorough monitoring (ECB, 2020). Supervisory authorities should develop
contingency plans for institutions displaying substantial fragilities (IMF, 2020).
Tackling a surge in credit defaults will require adapting the national strategy to reduce non-performing
loans. Such strategy should be diversified, and include measures facilitating the internal management of
non-performing loans by banks (on-balance sheet approach) and developing distressed debt markets.
Supervisory authorities have reinforced the monitoring of banks’ plans for resolving NPLs and introduced
new tools to ensure timely recognition of losses and debt restructuring, in line with those adopted at the
EU level. These measures should be strengthened, should they prove insufficient.
Developing distressed debt markets is also paramount. The bid-ask divide (i.e. the gap between the price
at which banks are willing to sell non-performing loans and the market price) is a major factor blocking the
development of secondary markets for non-performing loans (OECD, 2021c). Measures to improve loan
recovery and to raise prospects of efficient repossession of collateral by lenders can contribute to increase
market valuations of non-performing assets and reduce the gap. The creation of asset management
companies, like done in Spain or Ireland, could also be reconsidered, as it can considerably accelerate the
clean-up of banks’ balance sheets (European Commission, 2018a; OECD, 2018b). In the recent past,
Portuguese authorities estimated that the potential for a bulk transfer of the non-performing loans in the
banking system to an asset management company was low given the characteristics of the underlying
assets (OECD, 2019b). This measure would be particularly suitable for addressing a large surge of non-
performing assets with relatively high quality of collateral (i.e. linked to loans of relatively large unit sizes
or commercial real estate). Establishing an asset management company is complex, especially if backed
by public funds. The company should ideally be funded by private investors, including selling banks to
avoid conflict with EU State-aid rules and the Bank Recovery and Resolution Directive. However, public
participation would be desirable should a large and widespread deterioration of bank asset quality arise in
the aftermath of the pandemic, resulting in a threat to financial stability (OECD, 2021c).
Digitalisation efforts can help to improve the efficiency in the banking sector and to restore margins. Banks
will need to make better use of innovative Fintech solutions by underpinning digital delivery models, making
service delivery faster and more cost effective, or improving the efficiency of back-office functions. For
example, in the UK, collaboration with a Fintech platform reduced the amount of time required to process
loan requests for SMEs from 2-4 weeks to 24 hours (KPMG, 2017). The development of regulatory
sandboxes by the supervisory authorities are welcome as it can help banks to adopt new financial products
and services. Indeed, regulatory sandboxes allow the pilot testing of newly developed technologies within
a well-defined space and duration, with safeguards to contain the consequences of failure. The Portugal
FinLab initiative offers in-depth consultations to some Fintech innovators with the Portuguese regulatory
authorities (see Chapter 2). At the same time, the National Competition Authority points to important entry
barriers in the Fintech sector that need to be addressed (Competition Authority, 2021). Finally, banks that
have already exhausted cost-saving opportunities and have not yet attained sustainable profitability levels
might opt to consolidate branches to exploit potential cost synergies, but the impact on competition needs
to be monitored (European Commission, 2020c).
Table 1.6. Past OECD recommendations to address fiscal and financial risks
Recommendations in past surveys Actions taken since 2018
Simplify the tax system by reducing the use of special A number of tax benefits have been eliminated (i.e. Vehicle Tax exemption for
provisions (e.g. tax exemptions, special rates) and ambiguity in vehicles powered by natural gas used for rental and taxes), the exemption from
the tax language. the oil and carbon taxes in the production of electricity through non-renewable
forms (coal, fuel oil, natural gas) is phased out, some activities are not covered
by VAT reduced rates anymore.
Competent authorities should continue to monitor NPL The Bank of Portugal issued guidelines for the timely identification of situations
reduction plans, translating performance in achieving targets in which borrowers are facing financial difficulties, the setting up of sustainable
into capital requirements. solutions for viable customers and on credit risk measurement.
Despite robust economic growth and labour market improvements before the pandemic, in-work poverty
has remained high (Figure 1.24, Panel A). Causes for in-work poverty are complex, but the high degree of
labour market segmentation plays an important role (OECD, 2009; European Commission, 2019a). In
Portugal, workers with non-standard employment, i.e. self-employed workers and those on temporary or
part-time contracts, have three times higher income poverty rates than dependent employees (OECD,
2020h). While part-time employment is low, the share of temporary employment as a percentage of
dependent employment was among the highest across the OECD in 2019, especially among young
workers (Figure 1.24, Panel B and D). Furthermore, non-standard employment is prevalent in sectors
heavily hit by the pandemic (Figure 1.24, Panel C). Despite the efforts to protect jobs, economic hardship
of workers in these sectors and without standard employment contracts may further accentuate as the
pandemic continues.
Tackling labour market segmentation by reducing temporary employment can have beneficial effects on
the incidence of in-work poverty (Autor and Houseman, 2005). In line with past recommendations from
OECD Economic Surveys (OECD, 2019b; OECD, 2017a), progress has been made in that direction,
mostly by discouraging the use of temporary contacts. The 2019 labour market measures reduced the
maximum accumulated duration of fixed-term contracts from 3 years to 2 years. The duration of the
exemptions of social security contributions for young people obtaining their first job and the long-term
unemployed has been extended to promote permanent contracts (European Commission, 2019a).
However, the planned introduction of a penalty for employers that use fixed-term contracts excessively has
been delayed due to the deterioration of economic conditions. It should be implemented as soon as the
recovery is firmly underway.
Figure 1.24. In-work poverty and the share of temporary contracts remain high
A. Poor workers B. Share of temporary employment
Share of employees with household disposable Per cent of dependent employment, 2019
income below the poverty line, 2016-18
% %
7 35
6 30
5 25
4 20
3 15
2 10
1 5
0 0
FIN
ITA
FIN
IRL
ISL
ITA
LTU
NLD
USA
SVK
DNK
CZE
NOR
FRA
SVK
GBR
SVN
CHE
DEU
GRC
LVA
HUN
LUX
GBR
AUS
HUN
NOR
CZE
DNK
TUR
DEU
GRC
CHE
CAN
FRA
NLD
KOR
BEL
AUT
POL
SWE
ESP
PRT
EST
AUT
BEL
SWE
PRT
POL
ESP
CHL
COL
OECD
OECD
C. Non-standard workers in activities most D. Share of temporary contracts among young
affected by containment measures¹ people
Per cent of employment in respective sectors, 2018 Per cent of dependent employment, 15-29 years-
% % old, 2019
70 60
60 50
50
40
40
30
30
20
20
10 10
0 0
FIN
FIN
IRL
ITA
LVA
SVK
ISL
IRL
ITA
ESP
LVA
LTU
HUN
LUX
ISL
DNK
OECD-EU
DNK
CHE
DEU
FRA
EST
SVK
SVN
FRA
CZE
DEU
CHE
GRC
LTU
HUN
NOR
AUT
PRT
ESP
NLD
AUT
SVN
NLD
GBR
BEL
EST
CZE
LUX
GRC
BEL
PRT
SWE
POL
GBR
NOR
SWE
POL
EU28
Note: 1. Non-standard workers are identified as workers in temporary contracts, in part-time jobs, and the self-employed. The sectoral data are
classified according to ISIC rev. 4. The sectors included are construction (VF), wholesale and retail trade (VG), accommodation and food services
(VI), real estate services (VL), professional service activities (VM), arts, entertainment and recreation (VR), and other service activities (VS).
The latter two are grouped together as arts, entertainment and other services in the figure. Other services include service categories not included
in other service sectors, such as the repair of computers and personal and household goods. The empirical analysis is restricted to European
OECD countries for which harmonised micro-level labour force surveys are available.
Source: OECD (2020), OECD Employment Outlook 2020; OECD, Labour Force Statistics (database); OECD (2020), OECD Economic Outlook,
Volume 2020 Issue 1.
StatLink 2 https://stat.link/6gvcst
Strengthening labour inspections is another effective policy tool to prevent abuses in the use of non-
standard contracts. Portugal intensified labour inspections during the crisis and increased hiring
substantially. By the end of 2020, the number of labour inspectors was for the first time in line with the
guideline of the International Labour Organisation reference ratio (ILO, 2006). Resources allocated to the
Labour Inspectorate should remain high. Evaluating and reducing administrative burden for inspectors, like
done in the Netherlands, the UK, Italy, and Denmark can help to achieve efficiency gains and free up
resources in the longer run (Blanc, 2012).
Increasing minimum wages might provide limited support to the large majority of the working poor who
cannot find a permanent job. The government aims to increase the monthly minimum wage up to EUR 750
by 2023 (from EUR 665 in 2021). While moderate increases tend to have little impact on employment and
can even contribute to stronger productivity growth, sharp and substantial increases can reduce job
opportunities for low-skilled workers (OECD, 2018c; Clemens and Wither, 2019). Keeping wages in line
with productivity remains essential to avoid pricing out low-skilled workers from the labour market.
Evaluating the effects of higher minimum wage on employment and poverty is also key, especially in the
context of changing labour market conditions. Setting up a technical independent body in charge of carrying
out such evaluations and providing recommendations, as done in Germany and United Kingdom, should
be envisaged.
The COVID-19 pandemic has accentuated structural challenges of social protection systems and renewed
attention to social safety nets (Hyee et al., 2020). Safety net benefits should ensure socially acceptable
living standards for households that have no or very low incomes from work, and do not qualify for other
benefits. They become an increasingly crucial part of governments’ strategies for stabilising family incomes
and relieving acute economic needs.
In Portugal, the minimum income benefit (Rendimento Social de Inserção) is low and subject to extensive
means testing (Arnold and Farinha Rodrigues, 2015). Topping up recipient’s monthly income, it was set at
around EUR 187 for a single person in 2020, well below the poverty threshold. The reference income
threshold needs to increase to improve protection against poverty risks. Despite efforts to increase its
coverage in the past, the benefit covers only around 20% of poor households, below the OECD average
(Figure 1.25). This is due to low entitlement and the complexity of regulations and procedures (European
Commission, 2015a). Establishing a one-stop shop application within the public employment system as
done in Austria and using data-linking to identify non-applicants can help to improve take-up (OECD,
2020i). A number of other social and means-tested benefits are directed to vulnerable groups (e.g.
Complemento Solidário para idosos, Prestação social para a inclusão, Pensões sociais mínimas, Apoio a
pessoas com dependência). Reducing the fragmentation of the benefit system and streamlining existing
benefits can improve efficiency of social assistance.
Figure 1.25. The adequacy of minimum-income benefits can improve
A. Minimum-income benefits recipients B. Adequacy of minimum-income benefits
Per cent of income-poor working-age households¹, Per cent of median disposable income of a jobless
2016 person without children, 2019
% %
100 50
90
80 40
70
60 30
50
40 20
30
20 10
10
0 0
FIN
FIN
ITA
ITA
EST
IRL
IRL
LVA
LTU
LUX
AUT
CZE
NLD
FRA
LVA
SVK
CZE
LTU
FRA
LUX
NLD
PRT
NOR
BEL
HUN
EST
ESP
AUT
DNK
GBR
OECD
HUN
NOR
PRT
GBR
DEU
OECD
BEL
ESP
SVK
DEU
DNK
SWE
SVN
SWE
SVN
Note: 1. “Income poor” refers to households with income below 50% of the national median. Lump-sum payments, grants, supplements and
refundable tax credits are not included.
Source: OECD (2021), Social Benefit Recipients (SOCR) Database and Benefits and wages: Adequacy of Guaranteed Minimum Income benefits
Database.
StatLink 2 https://stat.link/czrvf7
Housing affordability was already a challenge before the onset of the COVID-19 crisis due to strong
pressures on housing prices, especially for poor and middle-class households (Figure 1.26). Between 2007
and 2019, housing costs for poor households increased by 28% compared with 7% in the EU on average
(Eurostat, 2021). In 2019, around a third of the lowest income tenants in the private market were spending
more than 40% of their disposable income on rent (Figure 1.26, Panel B). Despite the government’s effort
to protect mortgage-holders and tenants by temporarily suspending rent and mortgage payments during
the pandemic, the sudden job and income losses brought by the COVID-19 crisis are bound to increase
the pressure on housing affordability further.
Housing supply has not responded to the increase in housing demand prompted by the low-interest rate
environment, high demand for tourist accommodation and policy incentives to foreign residential
investment (Figure 1.26, Panel C). Investment in rental housing has remained underdeveloped. The rental
market stands at 24% of total dwellings out of which merely 2% represents social housing (Figure 1.27,
Panel A). In addition, public spending on social housing has been low, mostly restricted within the Lisbon
and Porto areas (Figure 1.27, Panel B). Among policies that support housing affordability for low-income
earners, social housing implies lower trade-offs than subsidies and rent control (OECD, 2020j). The
government’s plans to increase the social housing stock to 5% of the total by 2026 are thus welcome.
Improving technical capacity in municipalities to design adequate housing projects and use available EU
funds will be key to achieve this ambitious target.
Figure 1.26. Fast increases in housing prices deteriorated housing affordability
A. Price-to-income ratio
B. Housing cost overburden rate for tenants C. Total number of dwellings completed in the
(private rent) year
Per cent of the population², 2019 or latest year Per cent of the total existing housing stock, 2018 or
available latest year available
% %
60 2.5
50 2.0
40
1.5
30
1.0
20
10 0.5
0 0.0
NOR
ITA
GRC
FIN
ISR
JPN
CZE
SVK
DEU
FRA
NLD
MEX
CAN
DNK
HUN
CHE
AUT
POL
AUS
ESP
GBR
USA
BEL
PRT
CHL
HUN
FRA
KOR
PRT
ESP
CZE
DEU
NLD
DNK
GBR
USA
COL
CHE
CAN
POL
AUT
CHL
AUS
SWE
SWE
OECD
OECD
10 0.3
0.2
5
0.1
0 0
JPN
FIN
TUR
ITA
IRL
COL
CZE
ESP
HUN
FRA
NLD
LVA
PRT
DEU
CAN
USA
AUS
SVN
HUN
PRT
SVK
CAN
DNK
FRA
AUS
BEL
POL
CHE
KOR
GBR
AUT
POL
CZE
USA
NOR
BEL
NZL
AUT
KOR
OECD
Burdensome construction procedures can undermine housing supply. The number of procedures and days
to get a building permit is higher in Portugal than in the average OECD high-income country (World Bank,
2020). Multiple overlapping procedures are imposed on providers of installation works such as lifts,
telecoms, water, sewage and alarms, which could benefit from simplification (European Commission,
2020a). Streamlining procedures can help to reduce the time to receive a building permit and ultimately
speed up the pace of housing development. The cost for obtaining a construction permit is also relatively
high by OECD standards and could be reduced (OECD, 2021d). Finally, future reform to the property
taxation should not aggravate housing affordability issues and aim at increasing tax progressivity.
The COVID‑19 crisis has put the spotlight on the long-term care sector. The pandemic has
disproportionately affected elderly people and their care workers. A range of measures have been in place
to protect these vulnerable groups, including restricting care home visits, prioritising testing and vaccination
of care home residents and staff (OECD/European Union, 2020). Nevertheless, addressing structural
shortcomings in the long-term care sector, especially underinvestment, is pressing due to the rapidly
ageing population (see Figure 1.3).
Spending on long-term care is one of the lowest across the OECD (Figure 1.28, Panel A), resulting in large
unmet needs (OECD, 2019f). Only around 2% of adults aged 65 and over received long-term care in 2019,
compared with around 11% in the OECD (OECD, 2021a). Similar to peer countries, Portugal relies on the
support by families and other unpaid caregivers to provide long-term care for older people. Unpaid
caregivers, mostly women, report worse self-perceived health outcomes and are disproportionately
affected by poverty (WHO, 2020). Recent measures to support informal caregivers (i.e. providing them
with a formal status, information, training, and a means-tested allowance) are welcome, but it is too early
to assess their impact. Measures are limited to family members and should be extended to all informal
caregivers (European Commission, 2019b).
Residential care capacity has grown from 1808 beds in 2007 to 8840 in 2015, but the provision of
institutional care is significantly lower than in other OECD countries, resulting in high occupancy rates and
long waiting times. Shortages are especially acute in larger urban areas, like Lisbon (WHO, 2020). Paid
home-based care has developed only recently in Portugal and remains marginal. Public home-help
services still reach less than 5% of elderlies (WHO, 2020). Geographical distribution of home care is
uneven, home-care teams have to cover long distance in areas with low population density. This calls for
increasing the funding of long-term care at the national level. Portugal’s Recovery and Resilience Plan
includes projects in the long-term care sector, amounting to around EUR 205 million.
The National Network of Continuing Integrated Care (RNCCI) and the Network of Social Services are the
main providers of long-term care services. The governance of public long-term care services is fragmented,
preventing the integration of services and thus optimising the service delivery (WHO, 2020). Improving
cohesion and eliminating overlapping services in the two public networks can improve access, coverage
and quality of services, not least by freeing up scarce resources. Integrating quality measures of hospitals’
performance could help to identify possible efficiency gains and free up resources to expand long-term
care capacity (Shaaban, Peleteiro and Martins, 2020).
Figure 1.28. The long-term care sector is under-resourced
A. Spending in the long-term care sector
Per cent of total spending on health, 2019 or latest available year
% %
30 30
25 25
20 20
15 15
10 10
5 5
0 0
ISR
ITA
FIN
SVK
HUN
LVA
LTU
FRA
CAN
JPN
DEU
LUX
ISL
CHE
IRL
DNK
NLD
PRT
POL
EST
ESP
SVN
CZE
AUT
BEL
GRC
KOR
GBR
NOR
SWE
OECD
ISR
IRL
DEU
SWE²
ITA
POL
JPN
CAN
FRA
SVK
CZE
DNK
BEL
USA
DEU
NLD
ESP
PRT
GRC
PRT
SVK
CZE
AUT
ESP
USA
DNK
NOR
GRC
AUT
NOR
ISR¹
IRL¹
SWE
FRA¹
OECD
BEL¹
JPN¹
NLD¹
POL¹
OECD
Note: 1. Break in time series. 2. Data for Sweden cover only the public providers. In 2016, 20% of beds in LTC for the elderly were provided by
private companies (but publicly financed). 3. Low education corresponds to a lower secondary education (ISCED 0-2).
Source: OECD Health Statistics 2019/2021; Eurostat Database (LFS and population demographics); ASEC-Census Population Survey for the
United-States; Census for Canada; Labour Force Survey for Israel; Survey on Long-term Care Workers for Japan.
StatLink 2 https://stat.link/7av9bw
Portugal has one of the lowest numbers of long-term care workers across 28 OECD countries (Figure 1.28,
Panel B). Recent OECD estimates show that this number will need to increase by 60% by 2040 (OECD,
2020k). However, poor job quality limits recruitment and retention in the sector. Professionals, mostly
women, report dissatisfaction because of low salaries, limited opportunities to progress professionally, high
workload and levels of stress and job instability (WHO, 2020). Long-term care workers are among the
lowest-paid: they earn around one third less than those working with similar qualifications in other parts of
the health care sector and this pay gap is higher compared to other countries (OECD, 2020k). The share
of temporary employment is also high in the long-term care sector compared with the hospital sector
(OECD, 2020k). Intensifying recruitment efforts and improving working conditions can help to address
these shortages. Increasing wages, reducing temporary contracts and offering opportunities for career
progression can help with staff retention (OECD, 2020l). Training programmes to access managerial
positions, as done in Korea for instance, can provide improved career perspectives.
Low qualifications of long-term care workers can affect the quality of care delivered. In Portugal, about
60% of long-term care workers hold minimum education levels compared to around 20% in the OECD
(Figure 1.28, Panel C). There is also no national curriculum for long-term care nurses and geriatric care
training remains optional (OECD, 2020k). Inadequately skilled staff increases the risk exposure for patients
who live in long-term care facilities. Before the COVID-19 pandemic, in 2019, Portugal had the highest rate
of health care-associated infections in the OECD (OECD, 2020l). Providing adequate skills to the long-
term care workforce is pivotal to ensuring the safety of residents. This requires making participation in on-
the-job training mandatory for personal caregivers, while adapting training options to staff needs and
constraints (OECD, 2020k). In Austria, the required ten-weeks training programme is free of charge and
can be done on-site during working hours. Portugal should also consider developing a curriculum for long-
term care nurses that includes geriatric care as done in Iceland.
Portugal has recorded improvements in many environmental areas in recent years, especially in reducing
CO2 emissions (Figure 1.29). GHG emissions per capita are below the OECD average and the country
achieved its Effort Sharing target for 2020 – a legislation established among EU Member States with
binding annual greenhouse gas emission targets (Figure 1.30, Panel A). The last coal power plants were
shut off at the end of 2021. However, reaching ambitious targets of the National Energy and Climate Plan
2030, i.e. 80% renewable electricity by 2030 and a carbon neutral economy by 2050 will be challenging.
Achieving carbon neutrality requires the replacement of fossil fuels with renewables sources in electricity
production and increased electrification, in particular in the transport sector (Figure 1.29). Portugal aims at
doubling the production of renewable electricity by 2030 from already high levels (25% of total energy
consumption compared to the OECD average of 10% and 54% of electricity production in 2019), mainly
through solar and wind energy (Figure 1.30, Panel B). Under the Recovery and Resilience Plan, spending
on green transition should reach EUR 3.1 billion (1.5% of 2020 GDP).
Figure 1.29. The energy and transport sectors are the main emitters of greenhouse gas emissions
A. GHG emissions, by main sources B. GHG emissions
2019 Index, 1990 = 100
1990 = 100
Other¹ 200
Waste 9%
mgmt Energy industries 175
7% 21%
150
Agriculture 125
11%
100
Industrial Transport
28% 75
processes Energy industries Manufacturing
12% 50
Transport Industrial processes
Manufacturing 25 Agriculture
12%
0
1990 1994 1998 2002 2006 2010 2014 2018
Note: Greenhouse emissions exclude emissions from land use, land use change and forestry, memo items and international transport. 1. The
category "Other" includes other fuel combustion sectors, fuels - fugitive emissions, other sectors and Indirect CO2.
Source: Eurostat (2020), "Greenhouse gas emissions by source sector", Eurostat Database; European Environment Agency.
StatLink 2 https://stat.link/trw53n
0.2 15% 6
10% 4
0.1 Portugal (demand-based)
Portugal (production-based)
5% 2
OECD (demand-based)
OECD (production-based)
0 0% 0
2000 2005 2010 2015 2000 2003 2006 2009 2012 2015 2018 Portugal OECD
Note: 1. Included are CO2 emissions from combustion of coal, oil, natural gas and other fuels. Gross Domestic Product (GDP) is expressed at
constant 2015 USD using PPP. 2. The sum of average explicit carbon tax and average fuel excise tax.
Source: OECD Green Growth Indicators Database; Eurostat, Environmental Statistics.
StatLink 2 https://stat.link/uqrfep
Intensifying efforts to greening the transport sector will become crucial to facilitate the transition to a carbon
neutral economy by 2050 and to improve air quality. The transport sector accounts for 28% of emissions
and are responsible for a high level of air pollution in cities (Figure 1.29). The level of nitrogen dioxide
(NO2) in Lisbon, Braga, and Porto are above EU air quality standards (European Commission, 2020a).
Measures to reduce emissions from transport can thus generate wide benefits for public health, well-being
and resilience to future health shocks. The National Climate and Energy Plan 2030 establishes clear goals
for the transport sector until 2030: a 40% reduction of GHG emissions compared to 2005 and a use of at
least 20% of energy from renewable sources. Public transport, active mobility and clean vehicles are the
three pillars to achieve these goals.
There is room to increase carbon pricing in the sectors not covered by the EU ETS, especially on non-road
emissions (Figure 1.30, Panel C). Portugal has an explicit carbon tax tied to the average EU ETS carbon
price. It increased from EUR 5/tCO2e in 2014 to EUR 23.7/tCO2e in 2020, but remains below levels needed
to meet the objectives of the Paris Agreement and below low-end estimates of the damage that carbon
emissions currently cause (EUR 30/tCO2e; OECD, 2019g). Portugal should progressively increase its
carbon tax and apply it across all types of energy uses. While diesel taxation is relatively high by
international comparison, diesel is still taxed at significantly lower rates than gasoline, despite emitting
higher levels of both carbon dioxide and harmful air pollutants per litre (OECD, 2019g; Harding, 2014). As
recommended in the previous Economic Survey (OECD, 2019b), the government should consider aligning
fuel excise taxes.
Cuts to greenhouse gas emissions from transport require a transition to a less polluting vehicle fleet.
Portugal has a national target of 30% of zero-emission vehicles (ZEVs) among new cars by 2030 (from
12%, IEA, 2020). To achieve this objective, subsidies for electric vehicles and the renewal of the public
sector vehicle fleet have been extended, and charging infrastructure has been developed. Both vehicle
taxation and the annual road tax for cars depend on engine capacity and CO2 emissions (European
Commission, 2020d). Bans of old polluting cars from city centres are in place, but needs to be reinforced,
not least by strengthening enforcement and enlarging traffic-free zones. Accelerating investment in public
transport is also crucial to avoid increases in transportation costs for low-income households and ensure
access to affordable mobility, as stressed in the previous OECD Economic Survey (Table 1.7).
Despite progress in the transition to the circular economy, waste management remains an important
challenge (Figure 1.30, Panel D). Portugal is one of the countries that missed the EU target of recycling
50% of municipal waste by 2020. Lack of infrastructure for separate collection, insufficient incentives for
waste management (including low landfill tax and low waste charges for households) and low public
awareness on recycling hold back the transition to a circular economy (European Commission, 2020d).
Portugal receives considerable amount of waste from other EU countries, including hazardous waste
(Reuters, 2020), but has started to demur the entry of this waste destined for landfill disposal since 2020.
The landfill taxes doubled from EUR 11 in 2019 to EUR 22 per tons in 2021, but remains below the OECD
average (Figure 1.30, Panel E). Portugal needs to increase its landfill tax further, as planned (to EUR 35
by 2025).
Further improving incentives for recycling will also be crucial and call for achieving the recycling targets of
the municipalities. The government should expand the door-to-door segregated collection systems for
household waste as it is relatively low compared to other European countries (European Commission,
2015b) and phase out the bring-side collection system. Such measures are found to increase municipal
recycling levels (European Commission, 2014). The envisaged adoption of pay-as-you-throw schemes by
municipalities can create incentives for separate collection. Finally, a new programme aimed at raising
public awareness of the need for recycling and waste prevention activity should be developed further.
These measures should be included in the Municipal Solid Waste Strategic Plan (PERSU 2030) under
preparation.
Despite average water availability above the European average, mainland Portugal has a severe seasonal
concentration of precipitation, resulting in frequent droughts and floods, and unevenly distributed water
resources. The water supply in the Algarve region is under stress, and the problem is expected to increase
with climate change (Azinheira, Segurado and Costa, 2019). The national strategy for Water Supply and
Wastewater (PENSAAR 2020) rightly focused on reducing water scarcity and improving water abstraction.
The new Strategic Plan for Water Supply and Wastewater and Rainwater Management (PENSAARP 2030)
aims, among others, at improving water efficiency, especially in water scarce areas such as Algarve. Water
abstraction fees are being improved in order to link them with water availability.
Water infrastructure needs upgrading. The rate of asset renewal is well below the level needed to
guarantee service quality over time (0.7% versus 2%) (EurEau, 2017; OECD, 2020m; European
Commission, 2020a). Investments needed to upgrade water and wastewater infrastructure are estimated
at around EUR 4.7 billion until 2030 (OECD, 2020m). Limited analytical capacity to assess investment
needs hinders some municipalities to upgrade their infrastructures. Portugal plans to use EU Funds to
close the infrastructure investment gap, including by providing technical assistance to local governments,
but amounts remain limited compared to estimated needs so far (i.e. around EUR 0.4 billion in the
Recovery and Resilience Plan).
Total freshwater abstraction per capita remains high, especially in the Southern region (Figure 1.30, Panel
F). Water pricing is an important tool to ensure full cost recovery, but also to provide adequate incentives
to use it efficiently. Average water billing is relatively low compared to other European countries (EurEau,
2020). A recent OECD study suggests there is room to increase water tariffs: it finds that, in European
countries including Portugal, more than 95% of the population could pay more for water supply and
sanitation without facing an affordability issue (OECD, 2020m). The regulator (ERSAR) provides guidelines
for water billing, but operators can set their own tariffs leading to some large discrepancies. ERSAR should
have the necessary enforcement tools (e.g. fines) to ensure compliance of water billing, either to control
excessive high tariffs or to avoid the practice of under-pricing.
Table 1.7. Past OECD recommendations on environmental policies
Recommendations in past surveys Actions taken since 2018
Encourage public transport use and the development of new- Investments in public transportation such as the expansion of metro
shared transport solutions, accompanied by appropriate network in suburban areas of Lisbon and Porto are underway. Other
supervision and regulation. measures included the Fare Reduction Program fleet renovations, the full
concession of public EV charging network, and the promotion of cycling
mobility.
Raise taxes on diesel fuel, and increase energy taxes on coal and The exemption from the oil and carbon taxes in the production of electricity
natural gas. through non-renewable forms (coal, fuel oil, natural gas) is being phased
out.
Corruption raises the cost of business, undermines public trust and hampers growth. It also
disproportionately affects the poor and the vulnerable by diverting resources from essential public services.
Over the last decade, Portugal has undertaken some measures to prevent economic crimes. The fight
against corruption needs to intensify to improve the business environment and the functioning of the public
administration. A recent survey suggests that more than half of Portuguese firms considered corruption as
a serious problem when doing business, above the EU average of 37% (European Commission, 2019c).
Moreover, only 30% of businesses have confidence that the police or prosecutors will deal with corruption
effectively (compared to 60% in Denmark or Finland, European Commission, 2017). This may explain
Portugal’s relatively high and increasing levels of “perceived” corruption compared to other OECD
countries (Figure 1.31).
The new national anti-corruption strategy for the period 2020-2024, which aims to improve the levels of
prevention, detection and prosecution of corruption, is thus welcome. It notably includes measures
temporarily banning the exercise of certain political offices by people who perpetrated crimes of corruption,
imposing the adoption of compliance programmes to some entities, increasing time limitations for
sanctioning some corruption-related crimes, and enhancing incentives to provide information on economic
crimes. The creation of an anti-corruption authority is foreseen, but not established yet. Information
campaigns encouraging citizens to repudiate corruption and educational content in schools will be
developed. Portugal has also made progress in strengthening anti-corruption efforts in public procurement.
Moreover, a decree aiming at the transposition of EU regulation to protect whistle-blowers was approved
in Parliament, which needs to be promulgated to be effective. Going forward, Portugal should continue
strengthening the prosecution mechanism (OECD, 2019b). Only 14% of those convicted for corruption in
2017 are serving a sentence in prison (European Commission, 2020a). It is crucial that on-going
discussions regarding illegal enrichment against acts of public administration translate into effective
legislative amendments.
2.5 1.6
2.0 1.4
1.2
1.5
1.0
1.0
0.8
0.5
0.6
0.0 OECD Portugal
0.4
-0.5 0.2
-1.0 0.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
ITA
FIN
CZE
FRA
JPN
IRL
TUR
PRT
BEL
MEX
GRC
ESP
POL
USA
AUS
AUS
GBR
CAN
DEU
CHE
NOR
SWE
C. Individual indicators, "Control of Corruption" D. Corruption by sector, "Control of Corruption"
Scale: 0 (worst) to 1 (best), 2018 Scale: 0 (worst) to 1 (best), 2019
Note: The Control of Corruption indicator captures perceptions of the extent to which public power is exercised for private gain, including both
petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests. Panel A shows the point estimate and the
margin of error. Panel C shows individual indicators, which underlie the "Control of Corruption" indicator by the World Bank: Panel D shows
sector-based subcomponents of the corruption indicator by the "Varieties of Democracy" Project.
Source: Panels A & B: World Bank, Worldwide Governance Indicators. Panels C & D: the Economist Intelligence Unit; the World Economic
Forum; the Gallup Organisation; the French Ministry of Economy and Agence francaise de Developpement; Political Risk Services; Global
Insight; Varieties of Democracy Institute, University of Gothenburg and University of Notre Dame; Transparency International.
StatLink 2 https://stat.link/uo430t
Enhancing the capacity in the judicial system to address cases related to economic and financial crime
that are often complex and require specific knowledge and expertise is crucial. As recommended in the
previous OECD Economic Survey, the Public Prosecution Office and the Criminal Investigation Police must
be allocated adequate resources to continue undertaking investigations (Table 1.8). Specialised training
for prosecutors should be reinforced and become mandatory. Finally, specialised courts with national
jurisdiction for corruption could be considered and the appeal procedures reviewed to prevent abuses.
Massive inflows of EU funds and envisaged relaxation of rules to fasten absorption pose risks of fraud and
call for establishing mechanisms that allow adequate scrutiny on the use of funds and accountability of
recipients. The national initiative to establish a digital platform to group information on all EU programmes
is a step in the right direction.
Measures to improve the accountability and integrity of senior public officials are also needed. Rules on
conflict of interest should be made stricter, as there have been repeated reports of engagement of high
ranked public officials in the private sector (especially practicing law) while holding office due to the non-
exclusive nature of their mandate (GRECO, 2018). The adoption of a code of conduct for Members of
Parliament in 2019 and new rules regarding notably the financing of Members’ political activity, intervention
in administrative and hiring procedures, and transparency obligations are steps in the right direction.
However, an efficient supervisory mechanism is still missing. For instance, the Entity for Transparency,
which is responsible for assessing compliance by holders of political and high public offices with rules on
individual declaration on income, property, and interests, is not yet functioning. The national anti-corruption
strategy acknowledges this issue and stresses the need to put this Entity into function as soon as possible.
Moreover, a general reform leading to a more effective disclosure of asset is still lacking (European
Commission, 2020a). Asset declarations should undergo frequent checks and be made publicly available.
Recent amendments to the relevant law strengthened the coverage of asset declarations, but were not yet
promulgated at the time of writing. Finally, rules and codes of conduct on how Members of Parliament
engage with lobbyists and other third parties who seek to influence the legislative process should be
introduced, as well as other integrity and transparency instruments such as a lobbying register (OECD,
2021e).
OECD indicators show that Portugal has room to strengthen the prevention and supervision of anti-money
laundering (Figure 1.32). Portugal has sound regulations to fight money laundering and terrorism financing,
achieving a high level of effectiveness in several areas such as the assessment of money laundering risks
and domestic coordination, international cooperation, investigation and prosecution of money laundering
(FATF, 2017). However, the Financial Action Task Force (FATF) (2017) identifies the lack of transparency
in the real estate sector, anonymous operations and transactions, and informal transfer systems as main
vulnerabilities in Portugal’s anti-money laundering framework . Crosschecks on applicants’ source of wealth
and funds used for investments in the real estate sector are conducted by the supervisory authorities only
ex-post, after the investment has already been made. Ex-ante checks on the source of investments would
reduce the high-level money-laundering risk associated in the real estate sector (FATF, 2017). Since 2017,
the latest on-site assessment by FATF, Portugal adopted a new law on the prevention of money laundering
and terrorist financing and created the Central Register of Beneficial Owners. In November 2019, the
Institute for Public Procurement, Real Estate and Construction created a unit dedicated to implement
AML/CFT controls, to develop supervisory programmes, to provide thorough guidance to obliged entities
and prepare the tools needed to enhance their understanding of the risks.
IRL
ITA
CZE
JPN
FRA
BEL
PRT
AUS
AUS
CAN
CHE
DEU
GBR
GRC
MEX
NOR
POL
USA
ESP
SWE
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on
Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of
their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard.
The figure shows first round results; a second round is ongoing. Panel B shows ratings from the FATF peer reviews of each member to assess
levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11
immediate outcomes. 1. "Investigation and prosecution" refers to money laundering. 2. "Investigation and prosecution" refers to terrorist
financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for
Tax Purposes; and OECD, Financial Action Task Force (FATF).
StatLink 2 https://stat.link/n4xta8
Table 1.9. Recommendations on macroeconomic and structural policies from the Key Policy
Insight chapter
MAIN FINDINGS RECOMMENDATIONS
(Key recommendations in bold)
High level of corporate debt and low profitability in the banking sector Develop equity markets to diversify financing sources, for instance by
undermine access to finance for SMEs, especially to acquire intangible establishing equity funds.
assets. Improve awareness of entrepreneurs on equity instruments tools.
Addressing medium-term fiscal challenges
Public debt exceeds 130% of GDP and increased contingent Once the recovery is firmly established, gradually phase out
liabilities can complicate fiscal consolidation. Details on the support measures and announce a clear and credible medium-
strategy to contain public spending in the coming years are term fiscal consolidation strategy.
missing.
Available EU funds, including under the Next Generation EU plan Ensure the transparent and effective implementation of
will reach record levels. Absorption might be slow due to hurdles in programmes financed with EU funds.
designing, approving and implementing programmes. Prioritise projects that have the strongest economic and social
impact by relying on cost-benefit analysis.
The modernisation of the budget framework, including the introduction of Accelerate the implementation of the budget reform. Allocate adequate
performance budgeting, has been delayed. Capacity to assess public resources for the development of data collection, data interoperability,
spending efficiency is limited. and analytical capacity.
A large number of tax benefits do not have clear objectives or do not Phase out inefficient special tax provisions.
prove efficient. They are complex and lack transparency.
Population ageing puts pressure on the financial sustainability of Duly implement the link between increases in the retirement age
the pension system. and life expectancy gains to continue to ensure the long-term
financial sustainability of the pension system.
Extend that link to the minimum age of early retirement.
The recycling rate of municipal waste is persistently low. Ensure the municipalities meet their recycling targets. In the medium
term, further increase the landfill tax.
The water abstraction rate remains high and current water prices do not Provide the regulatory authority with the necessary tools to impose
provide adequate incentives to use it efficiently. water tariffs to avoid underpricing.
While there are plans to increase resources for upgrading water Increase investment in water infrastructure further, and
infrastructure, they will be too low to ensure high quality services strengthen technical support to municipalities on how to design
and avoid leakages. Municipalities lack expertise to design and and implement infrastructure projects, using EU funds.
implement water infrastructure projects.
Rules on conflict of interest for statespersons are not strict. There Introduce codes of conduct on how to engage with lobbyists
are no specific rules for Members of Parliament on how to engage including a lobbying register.
with the private sector and lobbyists.
The real estate sector is vulnerable to money-laundering risk. Conduct thorough ex-ante checks on investments made in the real
estate sector.
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